Search for Q&As Submit a question

List of Q&As

Eligible collateral for the purpose of credit risk mitigation

Are American Depository Receipt (ADR) and Global Depository Receipt (GDR) considered as equity for the purpose of credit risk mitigation?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_1073 | Topic: Credit risk | Date of submission: 14/04/2014 | Date of publication: 25/07/2014

Repo conducted with a non-financial customer

Article 425 subparagraph 2(a) of Regulation (EU) No 575/2013 (CRR) states that: "Monies due from customers that are not financial customers for the purposes of principal payment shall be reduced by 50 % of their value or by the contractual commitments to those customers to extend funding, whichever is higher. This does not apply to monies due from secured lending and capital market-driven transactions as defined in point (3) of Article 192 that are collateralised by liquid assets in accordance with Article 416 as referred to in point (d) of this paragraph." As this provision refers only to secured lending conducted with liquid assets (and not non-liquid assets), it would seem to suggest that repos conducted with a non-financial customer using non-liquid assets is subject to only a 50% inflow rate (e.g. now 100%). Could the EBA please confirm the correct interpretation?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_783 | Topic: Liquidity risk | Date of submission: 28/01/2014 | Date of publication: 25/07/2014

Liquidity cash-flows

Article 418(1) of Regulation (EU) No 575/2013 (CRR) states that: “If the institution hedges the price risk associated with an asset, it shall take into account the cash flow resulting from the potential close-out of the hedge.” Could the EBA please confirm how this should be reflected within the liquid asset reporting?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_779 | Topic: Liquidity risk | Date of submission: 28/01/2014 | Date of publication: 25/07/2014

Valuation of liquid assets

If the institution hedges the price risk associated with an asset, it shall take into account the cash flow resulting from the potential close out of the hedge. Does this mean that: – the market value of the asset plus the market value of the hedge has to be reported? – all types of hedges, including CDS have to be included?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2013_509 | Topic: Liquidity risk | Date of submission: 06/11/2013 | Date of publication: 25/07/2014

Highly leveraged obligors

How to define/identify 'highly leveraged obligors' under Article 180(1)(a)?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2013_430 | Topic: Credit risk | Date of submission: 24/10/2013 | Date of publication: 25/07/2014

Definition of a financial institution

Following the corrigendum of November 30 2013, the definition of a “financial sector entity” (FSE) was modified, however, the definition of a “financial institution” (FI) remained unchanged. We seek clarification for the following two main issues: 1) Clarification is sought on whether all “undertakings other than institutions, the principal activity of which is to acquire holdings” – irrespective of whether the holdings in question relate to undertakings in- or outside of the financial sector – qualify as a financial institution (FI) (and accordingly as a financial sector entity (FSE) pursuant to Article 4(1)(27) of Regulation (EU) No 575/2013 (CRR)) for prudential consolidation purposes and also for purposes of capital deductions for investments in FSEs. 2) As the CRR does not give a definition of what “principal activity” means in relation to FI, there is room for interpretation leading to divergent treatment across Member States – in particular, where a bank owns shares in a holding company that owns a non-financial group (i.e. a group that does not undertake an activity under Annex 1 of Directive 2013/36/EU (CRD)). We seek clarification on whether an undertaking’s principal activity (e.g. to acquire holdings) needs to be determined on an individual basis (i.e. also in the case of holding companies) or whether it can be determined on the basis of its consolidated situation (i.e. including the holding company plus its non-financial subsidiaries and holdings) and by taking into account all relevant qualitative and quantitative criteria (e.g. proportion of assets, of profits and of capital resulting from the acquisition of holdings versus operating activities, including activities listed in Annex I to CRD; human resources deployed; etc) on group level.

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_857 | Topic: Own funds | Date of submission: 18/02/2014 | Date of publication: 18/07/2014

Inclusion of additional value adjustments in the IRB treatment of expected loss

In CRR article 159 we read the following: "Institutions shall subtract the expected loss amounts calculated in accordance with Article 158 (5), (6) and (10) from the general and specific credit risk adjustments and additional value adjustments in accordance with Articles 34 and 110 and other own funds reductions related to these exposures." Due to the wording and the grammatical structure of the above sentence we are having doubts as to which amounts should actually be used in the IRB treatment of expected losses.

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_950 | Topic: Credit risk | Date of submission: 17/03/2014 | Date of publication: 11/07/2014

Offset of Additional Value Adjustments (‘AVAs’) against Expected Loss (‘EL’) under Article 159

Would the EBA advise whether there is any limitation on the offset of AVAs against EL?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_933 | Topic: Credit risk | Date of submission: 11/03/2014 | Date of publication: 11/07/2014

Application transitional provisions: Deduction half from Tier 1 and half from Tier 2

The residual amount of specific items (e.g. point (d) of Article 36(1) CRR) shall be deducted half from Tier 1 items and half from Tier 2 items during transitional provisions (see for example 472 (6) and (11) CRR). Please specify the calculation logic to be considered by CRR users.

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_986 | Topic: Own funds | Date of submission: 19/03/2014 | Date of publication: 11/07/2014

Internal Model Method for counterparty credit risk: Determination of the effective expected exposure when the model captures the effect of margining (Article 285(1)(c))

Article 285(1)(c) states that 'if the model captures the effects of margining when estimating EE, the institution may, subject to the permission of the competent authority, use the model's EE measure directly in the equation in Article 284(5).'Does the adverb 'directly' mean that institutions have to calculate their Effective Expected Exposure (EEE) as1.) EffectiveEEtk = max{EffectiveEEtk-1 , EEtkmargined}, i.e. just insert margined EEs in the equation in Art. 284 (5) or2.) EffectiveEEtk = EEtkmargined, i.e. substitute the monotony operator by the margined EEs?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_819 | Topic: Market risk | Date of submission: 07/02/2014 | Date of publication: 11/07/2014

Calculation of the threshold deductions (from CET1) during the transitional period

In calculating the threshold deductions from Common Equity Tier 1 during the transitional period [Article 470] should the following items be fully or partially deducted from Common Equity Tier 1 according to the national discretion phase-in and/or filter? (i.e. should the “transitional period threshold” be exactly equal to the “full application threshold” or the former should be determined considering the national discretions phase-in/filter effects). More specifically: - Unrealized losses measured at fair value: in countries where national discretion rules provide [Article 467(2)] for a filter to not include in any element of own funds unrealised gains or losses on exposures to central governments classified in the “Available for Sale” category of EU-endorsed IAS 39, the Common Equity Tier 1 considered for the calculation of the threshold deductions during transitional period should be determined with or without those specific unrealized losses measured at fair value? - Loss carry forward: in countries where national discretion rules provide for a phasing-in of loss carry forward deductions (deferred tax assets that rely on future profitability and do not arise from temporary differences) [Article 469 (1)], the Common Equity Tier 1 considered for the calculation of the threshold deductions during transitional period should be determined by subtracting all the loss carry forward or just the applicable percentage determined by the national authority? - Shortfall of expected losses to provision: in countries where national discretion rules provide for a phasing-in of shortfall of expected losses to provision deductions (negative amounts resulting from the calculation of expected loss amounts for IRB institutions) [Article 469 (1)], the Common Equity Tier 1 considered for the calculation of the threshold deductions during transitional period should be determined by subtracting all the shortfall of expected losses to provision or just the applicable percentage determined by the national authority?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_842 | Topic: Own funds | Date of submission: 12/02/2014 | Date of publication: 11/07/2014

Inflows

Article 425(8) of Regulation (EU) 575/2013 states that "institutions shall not report inflows from any new obligations entered into". Is it the case that all forward starting transactions should be excluded from the LCR, including those which produce an outflow? For instance, a bank may enter into a forward starting reverse repo trade which begins in two days time, with a maturity one month from the settlement date. In the buffer, cash will be reported, however in two days time that cash will have been lent out and a lower quality asset may have been received; the trade is in affect a downgrade which has not yet been accounted for.

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_784 | Topic: Liquidity risk | Date of submission: 28/01/2014 | Date of publication: 11/07/2014

Securities borrowing transactions within the LCR - inflows

How should to treat potential inflows regarding an unsecured securities borrowing transaction as they are not mentioned within Article 425 (2) of Regulation (EU) No 575/2013 (CRR) be treated.

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_792 | Topic: Liquidity risk | Date of submission: 29/01/2014 | Date of publication: 11/07/2014

Large exposure reporting – reporting of central government and natural or legal persons controlled by the central government or interconnected with it

As large exposure reporting is based on a client data – how should an institution report exposure to the central government for large exposure purposes? Should it report the total exposure to the central government (and treat it as a single entity) or should it report exposures to all the entities which form the central government? What about in the case of group of connected clients which includes the central government and entities controlled/otherwise interconnected with it? As defined in Article 4(39) of Regulation (EU) No 575/2013 (CRR), central government can be included in "n" groups of connected clients. What is the correct reporting in such a case?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Regulation (EU) No 680/2014 - ITS on supervisory reporting of institutions (as amended)

ID: 2013_681 | Topic: Large exposures | Date of submission: 19/12/2013 | Date of publication: 11/07/2014

Supervisory reporting of bonds issued by promotional banks

In its instructions on the EBA LCR Monitoring Exercise for the end-June 2013 and end-September 2013 data collection the EBA gives examples of promotional banks whose bonds can be reported in row 10 of the ‘LCR EU Only’ tab, if they are not already reported in section A of that exercise. In this context we would like to raise two questions: 1. Is the list of promotional banks given in the instructions exhaustive and also applicable for the reporting of these assets in Row 180 of the Liquid Assets template of COREP (C 51.00)? 2. Do bonds issued by promotional banks always have to be reported in row 180 of the respective template?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Regulation (EU) No 680/2014 - ITS on supervisory reporting of institutions (as amended)

ID: 2013_628 | Topic: Supervisory reporting - Liquidity (LCR, NSFR, AMM) | Date of submission: 09/12/2013 | Date of publication: 04/07/2014

Residual maturity of exposures with an undefined maturity

Do exposures with an undefined maturity, such as deposits or time deposits which can be called by the depositor and must then be reimbursed with a delay shorter than three months, quality as such?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_883 | Topic: Credit risk | Date of submission: 26/02/2014 | Date of publication: 04/07/2014

Effect on the capital requirement of a guarantee where the right to call is linked to default versus another where it is linked to realised loss

Let’s take a portfolio level guarantee that is callable once losses from the exposures covered have been realised (and NOT when exposures DEFAULT); realised losses decrease the notional of the guarantee. As it can take years till losses get realised after the default event, while losses are still unrealised (but defaults have happened) the full notional is used to cover the whole portfolio. Our question is whether such a guarantee is eligible to be taken into account as unfunded credit protection and thus decrease the capital requirement of the sub-portfolio it cover?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_803 | Topic: Credit risk | Date of submission: 03/02/2014 | Date of publication: 04/07/2014

Own funds - Prudential Filters

Regarding the calculation of the prudential filters defined in Article 32 and 33 of Regulation (EU) No. 575/2013 (CRR) it is not clear if such filters shall be considered net or gross of the related tax effects. It seems reasonable to consider the filters net of tax effects. This will be consistent with the aim of such filters to exclude from Common Equity Tier 1 any increase in the institution's equity due to securitised assets and changes in its own credit risk, which are registered in the accounting framework net of tax effects.

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2014_720 | Topic: Own funds | Date of submission: 12/01/2014 | Date of publication: 04/07/2014

Treatment of SME-supporting factor in the case of secured exposures.

I. How should the SME-supporting factor be treated relating to secured exposures? a) Including all collaterals, i.e. also for guarantees. Thus risk weighted assets of inflow in asset class sovereigns or institutes will also be reduced? b) Only for those collaterals which cause no risk transfer (meaning which are intered directly in the RWA formula)? c) Only for the non-secured part of the exposure?II. General question when the SMR supporting factor can be used: a) To our understanding a risk transfer is only allowed in the case that the risk transfer is leading to a reduction of the RWA. Taking this into account it should always be compared “the total SME exposure with the supporting factor and without a risk transfer” to “the exposure with the SME supporting factor (only for the non-secured part) and the risk transfer without the supporting factor”. b) To consider the above mentioned point under II. a) it seems that banks under the IRB-A approach are by tendency favored as there is no risk transfer (e.g.in cases of a guarantee by a government) but the effect of the collateral is considered in the total LGD of the exposure.

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2013_565 | Topic: Credit risk | Date of submission: 27/11/2013 | Date of publication: 04/07/2014

Tier 2 instruments

In question 2013_31 the EBA clarified that non-step-up legacy Tier 1 instruments could be eligible, for the amounts exceeding the grandfathering limits, as fully eligible Tier 2 instruments with no time limit and independently of the frequency of calls, if conditions set in Article 63 are met. Article 63 (j) states that such Tier 2 instruments may be called where conditions in article 77 are met. Could the EBA confirm that article 77 would apply to such legacy non step Tier 1 bonds potentially fully eligible as Tier 2 and would effectively impose a constraint on the bank, so that the bank does not need to have a contractual call provision in the non-step-up legacy Tier 1 bond that states that the call can only be exercised with the approval of the regulatory authority to get this bond approved as Tier 2 ?

Legal act: Regulation (EU) No 575/2013 (CRR)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2013_544 | Topic: Own funds | Date of submission: 19/11/2013 | Date of publication: 04/07/2014