Risk weights for exposures towards Member States’ central governments and central banks denominated and funded in the domestic currency of that central government and central bank.

Shall exposures towards Member States’ central governments and central banks denominated in the domestic currency of that central government and central bank be given a 0% risk weight if they are funded by equity denominated in the same currency?

There is a licensed market participant – Central Securities Depository (thereafter - CSD) according to EU Regulation No 909/2014 that is not performing banking-type ancillary services as prescribed in the annex (Part C) to respective regulation.  Regulation (EU) No 2017/390 prescribes how to calculate the own fund requirements for CSD, including credit risk RWA according to Regulation (EU) No 575/2013 (CSD uses the Standardised Approach). CSD's balance sheet structure is different from institutions' balance sheet as for CSD the main source of funding is equity. In addition, CSD Regulation requires CSD to invest only in cash or in highly liquid financial instruments with minimal market and credit risks (EU Regulation No 909/2014 Article 46), investments that don't comply with the above rule are deducted from capital coverage. CSD applies Regulation (EU) No 575/2013 Article 114, point 4 and assigns 0% risk weight towards exposures to Member States’ central governments. The funding for these exposures is equity denominated in the same currency (euros). Liabilities form an insignificant proportion of entity's balance sheet and their amount is less than respective risk exposures to Member States’ central governments.   Requirement for fulfillment of this preferential treatment is based on point 54 of Basel II (footnote No 15) [1] . It means that a market participant (institution or CSD) can only apply a 0% risk weight to exposures towards Member States’ central government and central bank exposures when these assets are explicitly funded by liabilities; however, if the assets are funded by equity, such preferential treatment should not be applicable.    [1] International Convergence of Capital Measurement and Capital Standards - A Revised Framework, June 2004 (bis.org)