Specific credit risk adjustments on exposures in default

According to the Regulation (EU) No 575/2013 (CRR), Regulation (EU) No 183/2014 (RTS on the calculation of specific and general credit risk adjustments) shall specify the calculation of specific credit risk adjustments (SCRAs) and general credit risk adjustments (GCRAs) under the applicable accounting framework. In particular Article 4 of these RTS provides rules on the calculation of SCRAs and GCRAs for the purpose of the treatment of expected loss amounts according to Article 159 of the CRR. However the treatment of the SCRAs and GCRAs is defined in the CRR only, as the mandates of the RTS are limited to the scope elaborated on above. Article 159 of the CRR, regarding the treatment of expected loss amounts for institutions under the IRB approach, specifies that SCRAs on exposures in default shall not be used to cover expected loss amounts on other (i.e. non-defaulted) exposures. In practice, this means that the amount of shortfall or excess of provisions should be calculated on an aggregate level for IRB exposures, separately for defaulted and non-defaulted exposures. The excess of provisions for defaulted exposures cannot be used to cover the shortfall of provisions for non-defaulted exposures. However, there is no provision in the CRR which prevents the excess of provisions for non-defaulted exposures being used to cover the shortfall of provisions on defaulted exposures. A net excess of provisions for non-defaulted exposures, i.e. above the amount which is used to cover the shortfall of provisions on defaulted exposures (if any), shall be reported under row 910 of template C 01.00 of Annex I of Regulation (EU) No 680/2014 (ITS on Supervisory Reporting) and may be added to Tier 2 items in accordance with Article 62(d) of the CRR. A shortfall of provisions for non-defaulted exposures, however, shall be deducted from Common Equity Tier 1 (CET1) items pursuant to Article 36(1)(d) of the CRR, and reported under row 380 of template C 01.00 of Annex I of the ITS on Supervisory Reporting. A net shortfall of provisions on defaulted exposures, i.e. not covered by an excess of provisions for non-defaulted exposures, shall be reported under row 380 of template C 01.00 of Annex I of the ITS on Supervisory Reporting and deducted from CET1 items pursuant to Article 36(1)(d) of the CRR. An excess of provisions for defaulted exposures shall be reported under row 910 of C01.00 and may be added to Tier 2 items in accordance with Article 62(d) of the CRR. To ensure that the risk related to defaulted exposures is properly covered, institutions should calculate adequate ELBE (best estimate of expected loss for the defaulted exposure) and risk-weighted exposure amounts for their exposures in default in accordance with Articles 153(1)(ii), 154(1)(i) and 181(1)(h) of the CRR. This is without prejudice to any future guidance which may be issued by the EBA in this area.