2022_6466 Inclusion of expected loss for equity exposures in calculation of Expected loss amount reducing CET1

Question ID:

2022_6466

Legal Act:

Regulation (EU) No 575/2013 (CRR)

Topic:

Model validation

Article:

Art. 158 CRR

Paragraph:

(7), (8) or (9)

COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:

Regulation (EU) No 680/2014 - ITS on supervisory reporting of institutions (repealed)

Article/Paragraph:

Article 158

Disclose name of institution / entity:

Type of submitter:

Other

Subject Matter:

Inclusion of expected loss for equity exposures in calculation of Expected loss amount reducing CET1

Question:

Are the expected loss amount for equity exposures calculated in accordance with Article 158(7), (8) or (9) CRR included in the impairment comparison according to Article 159 CRR or not?

Shall the expected loss amount for equity exposures be deducted directly from Common Equity Tier 1 capital in row 380 of CA1 (in accordance with Article 36 (1)(d) CRR)? Even if as a consequence validation rule v4811_m would fail?

Background on the question:

In Regulation (EU) No 2021/451 - ITS on supervisory reporting of institutions, validation rule v4811_m compares the expected loss amount (EL) reported in CA1 (including expected loss for equities) with the expected loss amount for non-defaulted and defaulted exposures in CA4. However, since the expected loss for equity investments is not reported in CA4, the rule may not be met in certain cases.

With reference to Articles 36(1)(d), 159 and 158(5), (6) and (10) of Regulation (EU) No 575/2013 (CRR), it could be deduced that expected loss amounts for equity exposures are not to be included in the expected loss amount comparison. This is also in line with the modelling on the validation rules v4811_m and v0225_m. Thus, the EL from equity exposures is not to be deducted in line 380 of CA1, otherwise there cannot be a match with lines 100 and 145 in CA4. As a consequence, the validation rule v4811_m was breached.

In an older version of Regulation (EU) No 575/2013 , there was still a provision (in Articles 154 and 155 CRR) which required that the loss amounts for equity exposures are to be taken into account in the expected loss comparison according to the simple risk weight approach.

It could be confirmed that the expected loss amount for equity exposures calculated in accordance with Article 158(7), (8) or (9) CRR is not included in the impairment comparison according to Article 159 CRR. However, this expected loss amount for equity exposures is to be deducted directly from Common Equity Tier 1 capital in accordance with Article 36(1)(d) CRR. Therefore, in addition to any shortfall in value adjustments according to Article 159 CRR, the expected loss amount for equity exposures had to be reported in line 380 of the reporting form C01.00 of Annex I of Regulation (EU) No. 2021/451 (ITS on Reporting) and the validation rule fails.

Date of submission:

25/05/2022

Status:

Question under review

Answer prepared by:

Answer prepared by the European Commission because it is a matter of interpretation of Union law.