EBA · 2015_1869 Final Q&A

Risk weight for exposures to unrated institutions

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
121
Topic
Credit risk
Submitted by
Credit institution
Submitted
2015-03-04
Answered
2015-12-11
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Does Article 121 allow unrated institutions to be assigned government ratings only in the case of a government guarantee for the deposits of that bank? Additionally, does Article 121(3) apply to unrated institutions as well? Does it say that if we have a cash balance in an unrated bank we should assign a risk weight of 20%?

Background

For the example of a German bank that is not rated, should we assign risk weight to it of 20% because Germany has high rating or do we first need to make sure that government guarantees deposits? Under Article 121(1), are unrated institutions allowed to be assigned government ratings even in the case when there is no government guarantee for that particular institution? I.e. an unrated German bank, that is not backed by the German government, but is incorporated in Germany, would be assigned the same rating as the German government? Following on, does Article 121(3) also apply to the above example, as long as the maturity is below 3 months, would the risk weighting of the institution be 20% regardless of that institutions rating?

Answer

Exposures to institutions for which a credit assessment by a nominated ECAI is not available should be risk-weighted according to Article 121 of Regulation (EU) 575/2013 (CRR). This article, including all its paragraphs, applies to all institutions for which a credit assessment by a nominated ECAI is not available without any other particular condition and, accordingly, does not depend on the existence of a government guarantee for deposits. However, in accordance with Article 121(3), the risk weight shall be 20% specifically for exposures to unrated institutions with an original effective maturity not exceeding 3 months. If the exposure is secured by a central government guarantee that fulfils the requirements for unfunded credit protection set out in the Credit Risk Mitigation framework in Articles 213 to 215 of CRR, the guaranteed part of the exposure to an unrated institution could receive the risk weight of the central government providing the guarantee in accordance with Article 235 of CRR.

Original source: European Banking Authority, Q&A ID 2015_1869

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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