Consider a corporate (geographical location DE) exposure guaranteed by a sovereign (geographical location NL).
1) Do the CRM techniques with substitution effect (e.g. guarantees) impact the scoping of relevant exposures for the purposes of the Countercyclical Buffer? E.g. should a corporate exposure with a sovereign guarantee be considered a relevant exposure as sovereign exposures are not considered relevant in accordance with Article 140 of the Directive 2013/36/EU (CRD).
2) If the exposure is considered relevant, should CRM techniques with substitution effects be taken into account for the purposes of the calculation of the capital requirements for the purposes of the determination of the weighted average referred to in Article 140(1) CRD? E.g. can a sovereign guarantee be taken into account in the calculation of the capital requirement for a corporate exposure with a sovereign guarantee?
3) Article 84 of the (draft) ITS 2014/680 Annex 2 (as revised on 8 March 2016) requires geographical allocation on immediate obligor basis, i.e. any CRM (e.g. cross-border guarantee) should not change the geographical location to the location of the CRM provider. The BCBS FAQ on the Basel III Countercyclical Capital Buffer requires the usage of ‘jurisdiction of ultimate risk’, which substitutes the exposure to the location of the CRM provider. Can you please clarify which geographical location should be used for calculation and reporting of the CCyB and template C09.04?
Paragraph 84 of the (draft) ITS 2014/680 annex 2 (as revised on 8 March 2016): “In order to determine the geographical location, the exposures are allocated on an immediate obligor basis as provided for in Commission Delegated Regulation (EU) No 1152/2014 of 4 June 2014 with regard to regulatory technical standards on the identification of the geographical location of the relevant credit exposures for calculating institution specific countercyclical capital buffer rates. Therefore CRM techniques do not change the allocation of an exposure to its geographical location for the purpose of reporting information set out in this template.” Answer to the BCBS FAQ on the Basel III Countercyclical Capital Buffer 3.2: “For the purpose of the countercyclical capital buffer, banks should use, where possible, exposures on an “ultimate risk” basis. For example, a bank could face the situation where the exposures to a borrower is in one jurisdiction (country A), and the risk mitigant (e.g. guarantee) is in another jurisdiction (country B). In this case, the “immediate counterparty” is in country A, but the “ultimate risk” is in country B.”
According to Article 1(4) of the Commission Delegated Regulation (EU) No 1152/2014 (RTS on geographical location), in order to determine the geographical location, the exposures are allocated on an immediate obligor basis. Therefore CRM techniques do not change the allocation of an exposure to its geographical location for the purpose of calculation of countercyclical capital buffer.
In this regard:
1) A corporate exposure is a relevant exposure in accordance with Article 140(4)(a) of Directive 2013/36/EU (CRD), even if it is partially or fully secured by an eligible guarantee by a government, as the immediate source of risk is not to the sovereign.
2) The calculation of the capital requirements is based on all applicable provisions of Part Three, Title II of CRR, including those on credit risk mitigation. While the assignment to a country depends solely on the location of the immediate obligor as defined in the RTS on the geographical location, the own funds requirement is calculated taking into account eligible sovereign guarantees and other credit risk mitigants.
3) For the purposes of reporting template C 09.04 of Annex I to Regulation (EU) No 680/2014 (ITS on Supervisory Reporting), and as defined in Part II, paragraph 85
84 of the ITS on Supervisory Reporting, the geographical location of of the immediate obligor shall be used.
Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Directive 2013/36/EU (CRD).