Question ID
2016_2891
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
123, 124, 125, 126
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
N/A
Type of submitter
Credit institution
Subject matter
Standardised approach risk weighting
Question

In the scenario below, if the repayment of a retail depends on the client's business (and not the performance of the property), could a loan secured by immovable commercial property have a higher RW than a similar loan which is unsecured?

Background on the question

This query relates to the review of risk weights secured and unsecured lending under the standardised approach. The question is best posed by providing a scenario: A bank lends money to a client that meets the requirements to be classed as Retail under the standardised approach.

(A) If the loan is provided for working capital purposes and is unsecured then under article 123 CRR the loan receives a risk weight of 75%

(B) If the loan is provided for workings capital purposes and is secured by a commercial property (i.e. the risk of the borrower DOES NOT depend on the performance of the property) the loan would be classed under Article 126 CRR which carries a risk weight of 50%.

Under article 124(2) CRR competent authorities can set a higher risk weighting than those set out in article 126(2) CRR. The local competent authority has indeed availed of this option and has set a risk weight higher than 75%.

This has led to a situation whereby unsecured lending to a client gets a 75% risk weight but if the client provides collateral in the form of a commercial property the loan gets a risk weight higher than 75%.

For both loans the ability to pay the loan back comes from the client's business (and not the performance of the property) however the former is surely riskier lending yet gets a lower risk weighting.

Submission date
Rejected publishing date
Rationale for rejection

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.

Status
Rejected question