IFRS 9 Transitional arrangements - Distinction between defaulted and non-defaulted exposures for the calculation provided for in Article 473a(5)

Recital 3 of Regulation (EU) 2017/2395 explains that the objective of the transitional arrangement is to mitigate potentially significant negative impacts on CET1 capital arising from the introduction of expected credit loss accounting. Impacts on CET1 capital that are due to regulatory requirements shall not be neutralized. Article 473a(5)(a) of CRR does not refer explicitly to Article 159 of Regulation (EU) No 575/2013 (CRR). Article 159 CRR however  explains the treatment of expected credit losses calculated “ in accordance with Article 158 (5), (6) and (10) ”. The paragraphs of Article 158 mentioned above are themselves referenced in the calculation Article 473a(5)(a) of Regulation (EU) 2017/2395. It is reasonable to expect therefore that the calculation should take into account the Article 159 CRR requirement that specific credit risk adjustments on exposures in default shall not be used to cover expected loss amounts on other exposures. Consequently, the calculations described in Article 473a(5)(a) should be done separately for defaulted and non-defaulted exposures if an excess from defaulted exposures exists. In this case, A 2 IRB shall be the sum of any positive amounts resulting from the separate calculations for defaulted and non-defaulted assets.