On 11th May 2015, the European Banking Authority (EBA) launcheda consultation on the draft Regulatory Technical Standards (RTS) on specialized lending exposures.
Specialized lending exposures represent a subcategory of corporate exposures which is used in the scope of the internal rating based (IRB) approach for the calculation of capital requirements for credit risk, if the institution does not have its own approved estimates of risk parameters for this subcategory. In the standardized approach (STA), there is no comparable subcategory. The purpose of these exposures is to finance or operate physical assets, where the primary source of income and repayment of the obligation is directly the income generated by this asset. In other words, these exposures are characterized by a high degree of correlation between the debtor and the financed asset.
For each of these four classes, the draft lists theassessment factors and sub-factors, and it proposes a method of combining the resulting assessment in two options. According to the first option, it would be possible to award an overallcategorywhich is at most one level better than the worst partial assessment based on individual factors. The second option requires that the assessment factors are assigned weights and the resulting overall category would be calculated as a weighted average. However, the assigned weight could not be lower than 10%.
Consultation will last till 11th August 2015.
The EBA draft can be found on the following link: http://www.eba.europa.eu/regulation-and-policy/credit-risk/regulatory-technical-standards-on-specialised-lending-exposures
It can be compared with an earlier official information of theCNB regarding the same matter (in Czech): http://www.cnb.cz/miranda2/export/sites/www.cnb.cz/cs/legislativa/vestnik/2011/download/v_2011_05_20711560.pdf
The technical standards specify which risk factors and how institutions should combine in order to assign risk weights to specialised lending exposures when applying the so called ‘supervisory slotting criteria' under IRB (Internal Ratings Based) approach.
"The purpose of these RTS is to harmonise the assignment of
risk weights to specialised lending exposures for institutions that
apply the so called ‘supervisory slotting criteria' approach. These
final draft RTS will be part of the Single Rulebook aimed at enhancing
regulatory harmonisation in the banking sector in Europe.
Specialised lending is a type of exposure towards an entity
specifically created to finance or operate physical assets, where the
primary source of income and repayment of the obligation lies directly
with the assets being financed. These final
draft RTS define four classes of specialised lending: project finance,
real estate, object finance, and commodities finance and for each of
these four classes, a set of assessment criteria is specified by means
of a list of factors that institutions shall take into account. These
factors are further detailed in sub-factors and some of those in
sub-factor components. Institutions shall apply the approach set out in
these draft RTS to combine the assignments of the factors to the
categories in order to determine the final category and the risk weight
to be attributed to the specialised lending exposure. This approach
requires institutions to calculate the weighted average of the
assignments of the factors to the categories, where institutions should
determine the weights they assign to each factor, under certain strict
conditions. The approach followed in these RTS is in line with the
current Basel framework, which uses the so-called ‘supervisory slotting
criteria' approach under which specialised lending exposures are
classified into categories depending on the underlying credit risk.
These RTS have also taken into account the recent Basel proposals on
constraints on the use of internal model approaches."