For the purpose of the IRB Approach, in accordance with Article 166(1) CRR and as clarified in Q&A 2691, the exposure value should be the accounting value measured without taking into account any credit risk adjustments made. The calculation of IRB shortfall / excess in accordance with Article 159 CRR includes not only general and specific credit risk adjustments, but also additional value adjustments and other own funds reductions. This difference in wording between Article 166 and Article 159 may lead to inconsistencies in the treatment of exposures subject to additional value adjustments and own funds reductions and. In particular, this inconsistency may lead to double recognition of the adjustments in the calculation of capital requirements by recognising them both as a valid deduction from CET 1 and by using a decreased exposure value in the calculation of expected loss and RWA.

Article 1 of Commission Delegated Regulation 183/2014 (RTS on Credit Risk Adjustments) indicates that the amounts required to be included in the calculation of general and specific credit risk adjustments should be equal to all amounts by which Common Equity Tier 1 capital has been reduced in order to reflect losses exclusively related to credit risk according to the applicable accounting framework and recognised as such in the profit or loss account, irrespective of whether they result from impairments, value adjustments or provisions for off-balance sheet items.

On the basis of the above, it would seem that the exposure value for these loans should be calculated by increasing the accounting value (fair value) for the amount of credit risk adjustments embedded in the fair value calculation.

In this context, it is unclear whether it should be considered that where the fair value has decreased, the amount of this decrease represents the credit risk adjustments and that it should be added back for the purpose of determining the exposure value. It is also unclear how the provision of Article 166 interacts with Article 159 CRR.

In our view the contradiction could be avoided by specifying that any downward adjustments to fair value on credit exposures should be considered to reflect expected losses related to credit risk. This way, in accordance with Article 1 of Regulation 183/2014, all downwards adjustment to fair value would be treated as credit risk adjustments and would be reverted in calculating the exposure value under the IRB Approach.

We also suggest that previous Q&A 101 should be updated to clarify that credit risk adjustments include not only impairments but also other accounting provisions created on credit exposures. In particular, IFRS 9 requires credit risk adjustments not only on impaired exposures (classified as stage 3) but also on all other exposures included in stages 1 and 2.