EBA · 2017_3262 Final Q&A

Risk weight for the credit risk for third countries with supervisory and regulatory arrangements at least equivalent to those applied in the Union according to Article 114(7) CRR

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
114, para. 7
Topic
Credit risk
Submitted by
Credit institution
Submitted
2017-04-06
Answered
2017-09-22
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

If a third country has supervisory and regulatory arrangements at least equivalent to those applied in the Union (such as Turkey) what risk weight for the credit risk is assigned to the exposure of this country? For example, when the Turkish competent authority assigns a 0% risk weight to the credit risk of Turkey, can this risk weight be used by a German bank? What happens when Turkey issued bonds in EUR, USD, JPY and TKY? How is the difference in the risk weight in the case the Turkish competent authority assigns a 0% risk weight to all bonds?

Background

Article 114 (7) CRR states " When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent to those applied in the Union assign a risk weight which is lower than that indicated in paragraphs 1 and 2 to exposures to their central government and central bank denominated and funded in the domestic currency, institutions may risk weight such exposures in the same manner. " Moreover, on 12 December 2014 the European Commission has published an Implementing Decision (amended on 20 December 2016) that contains a list of third countries that are seen as "equivalent" to the Union with respect to their supervisory and regulatory arrangements. In December 2016 the Commission Implementing Decisions (EU) 2016/2358 was published in the Official Journal of the European Union, amending Implementing Decision 2014/908/EU. Annex IV of this Implementing Decisions has been extended by several third countries, one of which is Turkey. Until then, Turkey was risk weighted in the Standardised Approach with 100% due to the rating. Since then, several banks have changed the risk weight for the credit risk to 0%. The reason behind this is that these banks argued that for third countries with "equivalence" Article 114(4) CRR is applicable.

Answer

According to Decision 2016/2358, amending Decision 2014/908, Turkey has in place supervisory and regulatory arrangements which comply with a series of operational, organisational and supervisory standards reflecting the essential elements of the Union's supervisory and regulatory arrangements applicable to credit institutions, which are considered "equivalent" to those applied in the Union for the purposes of Articles 114(7) of Regulation (EU) No 575/2013. Thus, the treatment described in Article 114(7) CRR can be applied to exposures towards the Turkish central government and central bank which are denominated and funded in the Turkish currency, that is Türk Lirası. This implies that for the institution to assign to those exposures a lower risk weight - which is determined by the relevant Turkish competent authorities - those exposures need to be denominated in the Turkish currency, and at the same time the institution needs to have corresponding liabilities denominated in that currency. However, in the case of sovereign exposures that are not denominated in the domestic currency of the third country, the general treatment described in Article 114(1) CRR applies, that is exposures to central governments and central banks shall be assigned a 100% risk weight, unless a credit assessment by a nominated ECAI is available, in which case the risk-weights set in Article 114(2) CRR can be used.

Original source: European Banking Authority, Q&A ID 2017_3262

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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