Article 500a(1) of Regulation (EU) No 575/2013 (‘CRR’) provides for a temporary derogation from Article 114(2) CRR for exposures to the central governments and central banks of Member States that are denominated and funded in the domestic currency of another Member State. 

It follows that Article 500a(1) CRR applies to any rated exposures to central governments and central banks of Member States (i.e. for which a credit assessment by a nominated ECAI is available) that are denominated and funded in the domestic currency of another Member State, including government bonds issued by Member States that are denominated and funded in the domestic currency of another Member State. 

Article 113(3) CRR provides that, where an exposure treated under the Standardised Approach is subject to credit protection, the risk weight applicable to that item may be amended in accordance with Chapter 4. Furthermore, Article 235(1) CRR provides for the formula institutions shall use to calculate the risk-weighted exposure amounts for exposures subject to unfunded credit protection under the Standardised Approach (unless the unfunded credit protection gives rise to tranched transfer of credit risk for which Article 234 CRR applies). That paragraph specifies that the risk weight to be used in the formula to risk-weight the amount of credit risk protection GA as defined there in is the risk weight of exposures to the protection provider as specified under Chapter 2 of Part Three of the CRR, which is the risk weight under the standardised approach for credit risk.

As Article 500a(1) CRR is a temporary derogation from Article 114(2) CRR, it follows that, in accordance with Article 235(1) CRR, institutions shall apply Article 500a(1) CRR to exposures or parts of exposures guaranteed by central governments or central banks as if those exposures were direct exposures to central governments or central bank provided that the scope of and the conditions in Article 500a(1) CRR are met for such direct exposures, i.e. that a credit assessment by a nominated ECAI is available for the protection provider and that the unfunded credit protection provided by Member States’ central governments or central banks is denominated and the protected exposure is funded in the domestic currency of another Member State. 

This ensures that the same risk-weight treatment is applied to direct exposures to central governments and central banks of Member States that are denominated and funded in the domestic currency of another Member State and to exposures or parts of exposures guaranteed by central governments or central banks where relevant conditions are met. 

The above is without prejudice to the application of the volatility adjustment provided for by Article 233(3) CRR where unfunded credit protection is denominated in a currency different from that in which the exposure is denominated.