Under the current CRR II (see Art. 125 para. 3 for RRE and 126 para. 3 for CRE), institutions under the standardized approach for credit risk (SA) may derogate from point (b) of paragraph 2 of Article 125 (and 126) for exposures fully and completely secured by mortgages on residential property (or commercial immovable property) situated within the territory of a Member State, where the competent authority of that Member State has published evidence showing that a well-developed and long-established residential property market is present in that territory with loss rates below certain limits (0,3% for the fully and completely secured part, 0,5% overall losses, so called “hardtest”).

Under the future CRR III (see Art. 125 para. 2 for RRE and 126 para 2 for CRE), though the calculation of the hardtest seems to remain unchanged, the exposures covered by the data sample to be used for the calculation is reduced to IPRE as Art. 125 para. 2 refers only and exclusively to income producing real estate listed in Article 124 para. 2 point a iii) (i.e. IPRE, that do not fulfill the criteria in point ii) and the calculation explicitly refers to losses “aggregated across such exposures” (‘such’ meaning IPRE listed in Article 124 para. 2 point a iii). The same wording is used for commercial immovable property, with the loss calculation referring to IPRE listed in Article 124 para. 2 point b. 

As the next IP-Losses reporting refers to 31.12.2024 (ie. is effected under the CRR II regime), the required data to calculate the new SA-hardtest will not be available. Only, if an “of which: IPRE”-position is taken up in the reporting regulation for IP-losses reporting, will competent authorities in Europe have the required data (as of 31.12.2025) to calculate the hardtest for the purposes of the treatment of IPRE under the standardized approach for credit risk. So, up until March 2026 (submission date of IP Losses under CRR III and subsequent first calculation of the IPRE-loss rates according to CRR III) risk weights for IPRE shall be calculated on the basis of the bucket approach. 

Is our understanding of the calculation of the future hard test under the standardized approach for credit risk (using data only for IPRE) and its consequences (hardtest cannot be published so that risk weighted assets of IPRE in Europe shall be calculated using the bucket approach) correct?