For exposures guaranteed by a Member State’s central government where the guarantee is denominated in the domestic currency of that central government, the central government as protection provider shall be assigned a 0% risk weight if the exposure is denominated in a different currency that is the currency of another Member State?
Article 235 (1) specifies the formula for the calculation of the risk-weighted exposure amounts for exposures covered by unfunded credit protection.
In this formula the risk weight of the protection provider (marked by “g”) shall be used for the covered part of the exposure and the applicable risk weight is specified under Chapter 2. Based on Article 114 (4) in Chapter 2 the risk weight of the protection provider is 0% to be applied in case of guarantees issued by a Member State’s central government that is denominated in the domestic currency of that Member State when calculating risk-weighted exposure amounts for the purposes of Article 113(3) as prescribed in Article 235 (1).
According to the formula the amount of the credit risk protection (marked by “GA”) shall be calculated by taking into account the effects of any mismatches (currency and maturity mismatch) between the guarantee and the protected exposure. When the credit protection is denominated in a currency different from that in which the exposure is denominated, the value of the credit protection shall be reduced by the application of volatility adjustments in line with Article 233(3). This treatment is applicable for the case when the guarantee provided by a Member State’s central government is denominated in the domestic currency of that Member State and the guaranteed exposure is denominated in a different currency, the domestic currency of another Member State.
Accordingly, the risk-weighted exposure amount of the guaranteed exposure reflects the currency mismatch by a reduced amount of credit protection.
This question has been rejected because the issue it deals with is already explained or addressed in Article 253(3) of Regulation (EU) No 575/2013 as amended . For further information on the purpose of this tool and on how to submit questions, please see 'Additional background and guidance for asking questions'