Calculation of the Countercyclical Capital Buffer

Consider a corporate (geographical location DE) exposure guaranteed by a sovereign (geographical location NL). 1) Do the CRM techniques with substitution effect (e.g. guarantees) impact the scoping of relevant exposures for the purposes of the Countercyclical Buffer? E.g. should a corporate exposure with a sovereign guarantee be considered a relevant exposure as sovereign exposures are not considered relevant in accordance with Article 140 of the Directive 2013/36/EU (CRD). 2) If the exposure is considered relevant, should CRM techniques with substitution effects be taken into account for the purposes of the calculation of the capital requirements for the purposes of the determination of the weighted average referred to in Article 140(1) CRD? E.g. can a sovereign guarantee be taken into account in the calculation of the capital requirement for a corporate exposure with a sovereign guarantee? 3) Article 84 of the (draft) ITS 2014/680 Annex 2 (as revised on 8 March 2016) requires geographical allocation on immediate obligor basis, i.e. any CRM (e.g. cross-border guarantee) should not change the geographical location to the location of the CRM provider. The BCBS FAQ on the Basel III Countercyclical Capital Buffer requires the usage of ‘jurisdiction of ultimate risk’, which substitutes the exposure to the location of the CRM provider. Can you please clarify which geographical location should be used for calculation and reporting of the CCyB and template C09.04?

Paragraph 84 of the (draft) ITS 2014/680 annex 2 (as revised on 8 March 2016): “In order to determine the geographical location, the exposures are allocated on an immediate obligor basis as provided for in Commission Delegated Regulation (EU) No 1152/2014 of 4 June 2014 with regard to regulatory technical standards on the identification of the geographical location of the relevant credit exposures for calculating institution specific countercyclical capital buffer rates. Therefore CRM techniques do not change the allocation of an exposure to its geographical location for the purpose of reporting information set out in this template.” Answer to the BCBS FAQ on the Basel III Countercyclical Capital Buffer 3.2: “For the purpose of the countercyclical capital buffer, banks should use, where possible, exposures on an “ultimate risk” basis. For example, a bank could face the situation where the exposures to a borrower is in one jurisdiction (country A), and the risk mitigant (e.g. guarantee) is in another jurisdiction (country B). In this case, the “immediate counterparty” is in country A, but the “ultimate risk” is in country B.”