Question ID
2018_4091
Legal act
Directive 2013/36/EU (CRD)
Topic
Supervisory reporting - Supervisory Benchmarking
Article
78
Paragraph
2
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Draft ITS on Supervisory Reporting of Institutions (for benchmarking the internal approaches)
Article/Paragraph
Draft ITS on 2019, part 2.2 Credit risk changes
Type of submitter
Credit institution
Subject matter
Reporting of exposures whose collateral type is (g) credit derivatives, (h) guarantees or (i) unfunded credit protection
Question

How to report exposures whose collateral type is (g) credit derivatives, (h) guarantees or (i) unfunded credit protection?

Background on the question

Reporting of original exposures under IRB approach that are guaranteed by an SA guarantor.

According to the Draft ITS on 2019 portfolios in the supervisory benchmarking exercise (EBA-2018-ITS-04) published the last 2nd July 2018 in the Draft benchmarking package for 2019 exercise (end 2018 data), for the reporting of Low Default Portfolio exposures whose collateral type is (g) credit derivatives, (h) guarantees or (i) unfunded credit protection, we should proceed as follows: “For RW substitution: original exposures under SA are not reported anyway. For original exposure under the IRB approach, the covered portion (from an SA guarantor) would not be reported too, since the RW of the guarantor is computed using the SA. “ In other words, that exposures guaranteed by a SA guarantor should not be reported in the Benchmarking exercise. However it does not meet the definition provided in the Instructions of the Own Funds COREP reporting “C 08.01 - Credit and counterparty credit risks and free deliveries: IRB Approach to Capital Requirements (CR IRB 1)”, which states in the instructions for Column 80 that: “Institutions report the exposure value before taking into account any value adjustments, provisions, effects due to credit risk mitigation techniques or credit conversion factors. The original exposure value shall be reported in accordance with Article 24 of CRR and Article 166 (1) and (2) and (4) to (7) of CRR. The effect resulting from Article 166 (3) of CRR (effect of on balance sheet netting of loans and deposits) is reported separately as Funded Credit Protection and therefore shall not reduce the Original Exposure.” In other words, that in this column we have to report the exposures before taking into account any CRM substitution technique. As it is stated, there is an inconsistency between both Reports. In addition, the Annex IV of Benchmarking instructions for original exposure explicitly refers to the COREP definition of Column 020. Example given: There is an exposure of 100 m.u. with an AIRB counterpart, which is guaranteed by an SA guarantor. Should we report this exposure in column 080 (Original Exposure) of Template C.102?

Submission date
Final publishing date
Final answer

For the purpose of this Q&A, the definitions and the methodologies used in the context of credit risk mitigation are further described in the Guidelines on Credit Risk Mitigation for institutions applying the IRB approach with own estimates of LGDs.

The clarification introduced in the Background and Rationale (Section 2) of the Draft ITS on 2019 portfolios in the supervisory benchmarking exercise (EBA-2018-ITS-04), provides that, in the case of an exposure with a guarantor risk weighted under the Standardised approach,  when this guarantor is taken into account in the RWA via a RW substitution, the covered portion should not be reported (since the RW of the guarantor is computed using the SA). However, the clarification introduced in the Background and Rationale (Section 2) of the Draft ITS on 2019 portfolios in the supervisory benchmarking exercise (EBA-2018-ITS-04), provides that when RW substitution is applied, the covered portion from an SA guarantor should not be reported (since the RW of the guarantor is computed using the SA), holds only for those values reported after taking CRM substitution effects into account, and not for the original exposure value (pre conversion factor) to be reported in column 080 in C 102 and C 103 of Annex III . As specified in Annex III and explained in Annex IV, the original exposure value (pre conversion factor) should be reported in column 080 of C 102 and C 103 of Annex III, whereas the exposure value after CRM substitution effects (and pre conversion factors) should be reported in column 090 of C 102 and C103 of Annex III.  
In the case of an exposure guaranteed by an SA guarantor and where a substitution of RW is used,
- the secured part of the exposure should be reported in column 080 under the exposure class of the obligor (with “collateralization status” as “exposures with credit protection”), and the exposure should not be reported in column 090 because the RW of the guarantor is computed using the SA.
- the unsecured part of the exposure should be reported in column 080 under the exposure class of the obligor (with “collateralization status” as “exposures without credit protection”) and in column 090 under the exposure class of the obligor (with “collateralization status” as “exposures without credit protection”),

However, it should be noted that in the case where another approach than a substitution approach is used to recognize the effect of the credit protection (such as a modelling approach), the secured part should also be reported in the other columns of the templates in annex 4 under the exposure class of the obligor (with “collateralization status” as “exposures with credit protection”),

See also Q&A 4093.

Disclaimer:   The present Q&A on Supervisory reporting is provisional. It will be reviewed after the Implementing Regulation is in force and published in the Official Journal. The text of the Implementing Regulation may differ from the text of the draft ITS to which this Q&A refers.

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.
Note to Q&A

Update 26.03.2021: This Q&A has been updated in the light of the most recent amendments to the ITS 2016/2070 on Supervisory Benchmarking.

Disclaimer

The Q&A refers to the provisions in force on the day of their publication. The EBA does not systematically review published Q&As following the amendment of legislative acts. Users of the Q&A tool should therefore check the date of publication of the Q&A and whether the provisions referred to in the answer remain the same.