Does the entering into force of the Regulation (EU) 2019/630 of the European Parliament and of the Council of 17 April 2019 (the “Prudential Backstop Regulation”) affect the determination of which risk weight that should be applied according to Article 127 CRR when an entity subject to CRR purchases non-performing loans booked at purchase price (net book value, “NBV”), which is significantly below the loans’ gross book value (“GBV”)?
According to the EBA Single Rulebook Q&A Question ID 2017_3270 published on 21 September 2018, for the purpose of deciding whether a risk weight of 100% rather than 150% applies according to Article 127 CRR, the difference between gross book value and net book value cannot be treated as a specific credit risk adjustment when an entity subject to CRR purchases non-performing loans. It is understood that the conclusion in the EBA Q&A is based upon a strict interpretation of the definition of “credit risk adjustment” in article 4(1)(95) CRR and the fact that CRR does not recognize the concept of “implicit coverage” through an acquisition made at market terms significantly below face value being comparable to a “credit risk adjustment” via provisioning in accordance with applicable accounting frameworks. The Prudential Backstop Regulation entered into force on 26 April 2019, i.e. after the publication of the EBA Q&A. Article 127 CRR is thereby amended and refers not only to “credit risk adjustments” but also to deductions made in accordance with point (m) Article 36(1). Article 47a(2) on non-performing exposures states that for the purpose of calculating the applicable amount of insufficient coverage for non-performing exposures under point (m) Article 36(1), the exposure value of a debt instrument that was purchased at a price lower than the amount owed by the debtor shall include the difference between the purchase price and the amount owed by the debtor, i.e. the difference between NBV and GBV. Provisions on how the applicable amount of insufficient coverage shall be calculated for the purposes of point (m) Article 36 (1) are specified in Article 47c. Point (b) Article 47c(1) equates specific credit risk adjustments with the difference between the purchase price and the amount owed by the debtor, where a non-performing exposure is purchased at a price lower than the amount owed by the debtor.
Please note that as part of adjustments to the Single Rulebook Q&A process, agreed by the EBA and the European Commission, it has been decided to reject outstanding questions submitted before 1 January 2020, when the Q&A process was updated as part of the last ESAs Review. In particular, the question that you have submitted has now regrettably been rejected and will not be addressed.
If you believe your question would still benefit from clarification, you are invited to resubmit your question, adapting it to reflect any legislative, regulatory or other relevant developments that may have occurred since the initial date of submission. The EBA will aim to address resubmitted questions as a matter of priority. When considering to resubmit, you are kindly requested to observe the updated admissibility criteria agreed in the context of the adjustment of the Q&A process, available in the Additional background and guidance for asking questions. We hope for your understanding.
For further information please refer to the press release and the updated Q&A page.