EBA · 2014_1697 Rejected question

Risk weight of guarantees not in the domestic currency of the borrower

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
Articles 114, 235, 495, para. 235 (4), 495 (2)
Topic
Credit risk
Submitted by
Competent authority
Submitted
2014-12-23
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Question

What is the correct risk weight of a loan, which has been granted to a client in euro, and guaranteed by an EU central government also in euro, but the domestic currency of the borrower is not euro?

Background

The risk weight of exposures to MS central governments is defined in Article 114 (4) as 0%. However, Article 235 (3) states that institutions may extend the treatment set out in Article 114(4) to exposures or parts of exposures guaranteed by the central government or central bank, where the guarantee is denominated in the domestic currency of the borrower and the exposure is funded in that currency. At the same time Article 495 (2) gives the possibility to use the same risk weight in relation to exposures to the central governments or central banks of Member States denominated and funded in the domestic currency of any Member State until 31 December 2017 as would be applied to such exposures denominated and funded in their domestic currency. Our problem is that Article 495 refers only to 114 (4) and not to 235 (3). This suggests that the preferential treatment provided by Article 495 is only for exposures to MS central government and not to exposures guaranteed by MS central governments. This procedure would be illogical and does not reflect the real risk of the exposure.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2014_1697

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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