On 17th January 2019 the European Banking Authority (EBA) published its final Guidelines on specification of types of exposures to be associated with high risk under Article 128(3) of Regulation (EU) No 575/2013 (CRR).
The “high risk items” represent an exposure classes relevant for the Standardised approach for credit risk as laid down in Article 112 of CRR. These exposures are assigned 150% risk weight.
The first section of the Guidelines clarifies the investments in venture capital firms and private equity as referred to in Article 128(2) CRR. This step was triggered by a lot of ambiguity about the notion of these topics. Investments in private equity or venture capital firms should include at least non-debt exposures constituting subordinated, residual claims on the assets or income of an enterprise not listed on an exchange, or debt exposures of a comparable character. The objective is generating a profit through, for example, a leveraged buyout, an initial public offering or any other way of selling the equity. Investments in venture capital firms include exposures to firms that provide funding to newly established enterprises.
The second section specifies the types of exposures other than those explicitly listed in points Article 128(2) that should be considered as high risk by application of Article 128(3) CRR because they are structurally different from common exposures of the same original asset class. This includes among other things the financing of speculative investments. If institutions identify such types of exposures they should notify the competent authorities in their jurisdiction.
EBA takes into account that Basel III finalisation issued in December 2017 no longer includes provisions on ‘higher risk exposures’. However, EBA considers it beneficial to issue these guidelines in order to ensure harmonised and consistent detection of high risk within institutions until any revision of these provisions has to be applied by institutions. The Basel III framework is expected to apply from 2022 onwards and will depend on European style of application.
When assigning exposures into classes the institutions should be aware of the prioritisation criteria using a decision tree scheme according to the Regulation 680/2014 on supervisory reporting (see point 64 in Annex II of that Regulation) where high risk items are placed high just below securitisation positions on the first place.
27-3-2019