Shall specific credit risk adjustments made on securitised defaulted exposures and treated in accordance with Article 110 CRR be recognised to reduce RWEA on securitisation positions with 1250% RW in application of Article 266(1) CRR?
The question refers to the case where a portfolio of defaulted loans is securitised, and significant risk transfer is achieved. The defaulted loans are sold (‘true sale’) to a Securitisation Special Purpose Entity (SSPE). Prior to their securitisation, the amount of specific credit risk adjustments is assumed to exceed the amount of EL from the defaulted exposures to be securitised. The non-performing loans are transferred to the SSPE (i) at a discounted price which is lower than the gross book value of the exposures and (ii) the discount to the gross book value is greater than the specific credit risk adjustments. Accounting wise, it is assumed that the net book value of the securitised exposures is fully de-recognised from the balance sheet of the originator, so that the specific credit risk adjustments made on the securitised exposures are also de-recognised.
Article 266(1) CRR allows institutions to reduce the RWEA of a securitisation position to which a 1250% RW is assigned by 12.5 times the amount of specific credit risk adjustments made on the securitised exposures. To the extent that specific credit adjustments are taken into account for this purpose they shall not be taken into account for the purpose of the calculation laid down in article 159 CRR. Article 159 CRR (third sentence) indicates that specific credit risk adjustments on defaulted exposures shall not be used to cover expected loss (EL) amounts on other exposures. This is further confirmed by EBA QA 2013_573 and by Article 73(h) of the EBA RTS on Assessment Methodology for IRB (EBA/RTS/2016/03).
In accordance with Article 266 of Regulation (EU) No 575/2013 (CRR) – in the wording before the application of Regulation (EU) 2017/2401 - to the extent that SCRA have not been de-recognised at the moment of the transfer of assets, the originator institution can reduce the RWA associated with securitisation positions that are risk weighted at 1250% by 12.5 times the amount of the specific credit risk adjustments made by the originator on the underlying exposures. The rationale of this reduction is that 1250% risk-weighted securitisation positions and specific risk adjustments are both assumed to cover expected losses on the securitised exposures and therefore the rule aims at avoiding double coverage of expected loss amounts.
However, because of the rationale behind the reduction, where there is a non-refundable purchased price discount (NRPPD) in the transfer of the assets to the securitisation special purpose vehicle, originator institutions should only be able to deduct from the RWA of the securitisation position (which in the case at hand is 1250% risk weighted and also benefits from the credit enhancement provided by the NRPPD) 12.5 times the amount of specific risk adjustments that are in excess of the NRPPD (since the exposure value of the securitisation position subject to a 1250% RW retained by the originator would reflect only part of the expected loss of the portfolio), if the originator has not registered an increase in equity for the potentially positive difference between the SCRA and NRPPD.
This question goes beyond matters of consistent and effective application of the regulatory framework. A Directorate General of the Commission (Directorate General for Financial Stability, Financial services and Capital Markets Union) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which the European Banking Authority publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.
Update 26.03.2021: This Q&A has not yet been reviewed by the European Commission in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).