EBA · 2014_933 Final Q&A

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

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
159
Topic
Credit risk
Submitted by
Credit institution
Submitted
2014-03-11
Answered
2014-07-11
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

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

Background

CRR Article 159 states that ‘Institutions shall subtract the expected loss amounts…from the general and specific credit risk adjustments and additional value adjustments(AVAs) in accordance with Articles 34 and 110’. In accordance with Recital (65) and Article 34 an institution must deduct the AVAs resulting from the application of the requirements of Article 105 (requirements for prudent valuation) to all assets measured at fair value where this results in a lower carrying value than that recognised for accounting. The Credit and Counterparty Risk capital requirements, including the EL amount, are calculated using the higher accounting values, not the AVA adjusted values. As a result, without an adjustment to the capital requirements on those assets, there is double hit to capital. The offset against EL in Article 159 is a means of mitigating that double hit. There are no other mechanisms with the CRR to offset PVAs.

Answer

The intention behind Article 159 of Regulation (EU) No. 575/2013 (CRR) is to ensure that expected loss amounts calculated under the IRB approach are only deducted from own funds to the extent they have not already been reflected through either:   -   general and specific credit risk provisions within in the financial statements, which are the starting point of the own funds calculation; or - adjustments to these general and specific credit risk provisions, deducted from own funds according to Article 34 to meet prudent valuation requirements of Article 105 of the CRR.   It is therefore only Additional Value Adjustments deducted from own funds according to Article 34 of the CRR that should be included in this calculation.

Original source: European Banking Authority, Q&A ID 2014_933

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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