Which date shall be used to determine the applicable factor that is used to calculate the amount determined in Article 47c(1)(a) CRR when the terms and conditions of a non-performing exposure, which was originated prior to 26 April 2019, have been modified by the institution in a way that increased the institution's exposure to the obligor and  the counterparty defaulted before the initial origination of the exposure?

The date on which the counterparty initially defaulted or the date on which the exposure was initially originated or the date on which the terms and conditions of the NPE have been modified by the institution in a way that increased the institution's exposure to the obligor?    

Additionally, which date is supposed to be considered if the default of the exposure/counterparty occurs after the initial date of origination of the exposure and before an increase in amount of exposure? The date of default or the modification date?

Article 36 (1) (m) of Regulation (EU) No 575/2013 (CRR) states that the amount of insufficient coverage for non-performing exposures (NPEs) shall be deducted from the Common Equity Tier 1 items of the institution. 

Article 47c CRR lays out the method of calculating the NPE CET1 deduction for exposures that are classified as non-performing according  to the definition of non-performing given in Article 47a and 47b. 

Article 469a(1) CRR exempts exposures from the provisions stated before if they originated prior to the 26 April 2019. 

Article 469a(2) CRR exempts exposures from the exemption of Article 469a(1) CRR if the terms and conditions of a non-performing exposure, which was originated prior to 26 April 2019, have been modified by the institution in a way that increased the institution's exposure to the obligor. These positions shall be considered as having been originated on the date when the modification applies. 

While it is stated clearly that institutions shall only calculate a CET1 deduction for positions that either originated on or after 26 April 2019 or that originated before this date but have been increased afterwards, the regulation does not give an unambiguous answer to the question of which date shall be used to determine the applicable factor according to Article 47c(2) – (4) CRR. 

The relevance of the question arises since the amount of insufficient coverage can vary strongly depending on the applicable factor and hence on the date that is used to determine the factor. 

We have considered the following different answers and rationales:

1. The initial date of default shall be used because it is the regulators intent that the applicable factor reflects the risk that is caused by an exposure which increases with the amount of time forgone since the default. 

2. An exposure cannot become non-performing before its date of origination. The exposure became non-performing on the day of its origination because the partner had already been defaulted on that day. However, to reflect the risk caused by the exposure more truly, the initial date of origination and not the modification date shall be considered. 

3. An exposure cannot become non-performing before its date of origination.

Art. 469a (2) CRR states that modified exposures shall be considered as having been originated on the date when the modification applies. Hence the date of modification shall be considered for the determination of the applicable factor. 

The rationale behind proposed answer C) seems to be directly plausible, however it can also foster regulatory arbitrage through forbearance measures which otherwise would not be granted.