EBA · 2017_3173 Final Q&A

Application of the definition of ‘speculative immovable property financing’ under the Standardised Approach

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
4, 128, para. 1(79), 2
Topic
Credit risk
Submitted by
Credit institution
Submitted
2017-02-20
Answered
2018-09-21
Answer provided by
ESAs (EBA, ESMA, EIOPA)
Browse ECB SSM Register → More Q&As on this regulation →

Question

In case the borrower is the developer of a real estate project for which future contract agreements with future owners have been signed about the properties under development, would this exposure fall within the scope of the speculative immovable property financing?

Background

We seek clarification on the correct allocation of a considerable amount of our corporate loan portfolio under either the ‘exposures to corporates’ or the ‘exposures associated with particularly high risk’ (due to speculative immovable property financing definition). This latter alternative appears to be backed by the definition in Article 4(1) (79) CRR. However, we doubt that those loans should be reallocated to ‘exposures associated with particularly high risk’ since we deem the nature of the term ‘speculative’ is not fulfilled in every case where the borrower (and the developer of the real estate project, in one) has signed future contract agreements with future owners about the selling of those properties (residential project are contracted of at least at 50% of the loan principal; commercial projects are contracted of at least at 100% of the loan principal).

Answer

As clarified in Q&A 3131 according to Article 128(2) (c) (d)   of Regulation (EU) No 575/2013 (CRR) speculative immovable property financing as defined in Article 4(1)(79) CRR is included among the “exposures with particularly high risks”.   In case of an exposure towards the developer of a real estate project, where future contract agreements with future prospective owners of the properties under development have been signed, but where these agreements are not irrevocable, the exposure will meet the conditions described in Article 4(1)(79) CRR for being classified as speculative immovable property financing and, as a result, needs to be assigned to the class of “exposures associated with particularly high risk” according to Article 112(k) CRR. Consequently the 150% RW applies to the exposure towards the developer.

Original source: European Banking Authority, Q&A ID 2017_3173

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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