Can the 100% risk weight set out in Article 39(2) CRR be reduced through a risk mitigation agreement in view of the risks covered by the 100% risk weight?
An institution has DTAs qualifying for the specific risk weight of 100% set out in Article 39(2) CRR. The institution plans to enter into a risk mitigation agreement covering the risk of non-conversion of DTAs into tax credit due to the following trigger events (a) failure of the tax authority to convert DTAs into a tax credit without change of tax law; or (b) conversion no longer required due to a change in tax law. Under the risk mitigation agreement the protection provider would compensate the capital cost for deduction/250% risk weight in case, following the occurrence of one of the triggers event, the DTAs would not qualify anymore for the specific risk weight of 100% set out in Article 39(2) CRR. The risk mitigation agreement does not cover the following: (c) change in tax law reducing the tax rate; (d) payment failure of the central government. The institution claims that such risk mitigation agreement would allow the application of a risk weight lower than 100%.
In accordance with the last subparagraph of Article 39 (2) of Regulation (EU) No 575/2013 (CRR), institutions shall apply a risk weight of 100 % to deferred tax assets that do not rely on future profitability and arise from temporary differences where all the conditions laid down in points (a), (b) and (c) of Article 39 (2) are met.
Article 39 (2) sets out a specific regime that does not provide for any form of risk mitigation; therefore, the above risk weight cannot be reduced through a risk mitigation agreement.
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.