A credit institution acquired an entire retail portfolio consisting of a large number of mortgage loans. Due to the large number of loans it is assumed to be impossible to review each and every single loan before the purchase in order to be able to assess whether the conditions in the abovementioned provisions have been met. Thus, the credit institution reviewed a sample of those loans, subsequently leading it to the conclusion that the relevant preconditions for assigning a 35% RW as set forth in Article 208 and 229 CRR are met. Furthermore, the seller of the portfolio contractually guaranteed that all of those loans were indeed fulfilling the criteria for assigning a preferential risk weight and, in the event that individual loans were to default, pledged to provide full compensation.

In effect, the institution considers assigning a preferential risk weight of 35% to be applicable based on the combination of the sample review and the guarantee. However, it is our legal opinion that the criteria set forth in Articles 208 and 229 CRR – which are to be adhered to when assigning a RW of 35% according to Article 125 (1) (c) CRR – basically require an individual assessment of each and every loan (or, respectively, its terms and conditions). This is, according to our understanding, also implied by Article 79 CRD IV, which requires institutions “to assess the credit risk of exposures to individual obligors.”

Furthermore we do not see legal grounds, upon which it seems possible to “combine” different credit risk mitigation techniques (namely those of a mortgage and a guarantee) in order to assign a preferential risk weight. It is thus presumed that the circumstances described above are in breach of the provisions in question. This notwithstanding, it seems difficult, both in practical and economic terms, and almost impossible to fulfil the requirements of those provisions when acquiring entire credit portfolios (at least in cases where such portfolios are not part of a securitisation transaction, but are instead individually reflected in the financial statements).

The purchasing of portfolios is not an uncommon transaction, with the risks of such transactions are usually partially reflected in the price of the portfolio (leading not only to risks, but also economic opportunities for the purchaser) and the acquisition of such portfolios is an important part of restructuring and resolution processes. We are therefore uncertain as to whether the provisions above are factually appropriate for such business activities as well as if there is room to apply them in a proportionate manner. A proportionate approach might be feasible within the EU in particular, in the event that the seller is a credit institution that has performed the abovementioned valuation and monitoring obligations beforehand and the competent supervisory authority of the jurisdiction of the selling credit institution did not contest the RW assigned by the selling institution.