In the context of a banking book FSE short position, EBA Q&A 2019_4517 states that any FSE netting according to Art. 45 CRR constitutes an additional credit risk exposure to the counterparty of the short position. The exposure value of this additional credit risk position is determined by the full amount that is no longer deducted due to the netting with the short position.
Neither Art. 36, Art. 46 (non-significant FSE holdings), Art. 48 (significant FSE holdings) nor the Basel framework provide a basis for the reporting of such additional credit risk exposure. In contrast, Art. 46 (4) includes explicit guidance on how risk weighted assets (RWA) for non-deducted amounts should be determined, and refers to the risk weights (RW) in accordance with Chapter 2 or 3 of Title II of Part Three (Capital Requirements for Credit Risk) and the requirements laid down in Title IV of Part Three (Market Risk). Within the credit or market risk frameworks, a netting of long and short positions is explicitly allowed. For example, Art. 155 (2) explicitly allows for an offsetting of long and short positions subject to certain requirements. We do not see the CRR provision that could be referenced as the basis for the interpretation outlined in EBA Q&A 2019_4517.
In contrast, Art. 46 (4) and Art. 155 require banks to perform such an offset also for credit risk RWA purposes. It is not clear why an additional credit risk exposure should be recognised from an economic risk perspective, as the derivative will already be subject to the capital requirements for counterparty credit risk in order to capture the default risk of the counterparty providing the hedge.
It is therefore unclear how the reporting of an additional credit exposure as outlined in EBA Q&A 2019_4517 is consistent with the CRR requirements.
If the EBA should maintain its view that such an additional credit risk exposure must be reported, we request additional guidance on how the exposure and the risk weight for this additional credit risk exposure should be determined.
With respect to the risk weight the following question arises: In case of an illustrative bank (10% CET1 threshold of 10bn, non-significant FSE holding pre netting of 11bn and post netting of 8bn) the CET1 deduction avoided due to FSE netting equals 1bn (11bn – 10bn). Hence an additional credit risk exposure of 1bn is recognised. The total amount of short FSE positions however equals 3bn. We request guidance on how the individual risk weights of the counterparties comprising the 3bn short position should be used to determine the risk weight assigned to the additional 1bn credit risk exposure.
With respect to the exposure the following question arises: In case the short position is provided in the form of a derivative, a counterparty credit risk exposure facing the counterparty providing the short position is already recognised. We request guidance as to whether the additional credit risk exposure can be reduced by the exposure value recognised for counterparty credit risk purposes.