Regulatory Reporting treatment in COREP of credit risk exposures linked to participated loans

Should exposures linked to loans participated in by other parties and de-recognised under IFRS 9 3.2.5 be reported as ORIGINAL EXPOSURE PRE CONVERSION FACTORS and mitigated by the amount received as the price paid for the participation or shall de-recognition allow the institutions to report ORIGINAL EXPOSURE PRE CONVERSION FACTORS equal to zero.

Institutions used sub-participations to shift their credit risk towards group affiliates or other institutions. Sub-participations entail the sale of the economic interest of a loan to the buyer of the participation and may entitle the selling institution to de-recognise the position as foreseen under IFRS 9 3.2.5 (pass through principle).  Currently the prevailing industry standard seems to be not to report such exposures in line with the accounting view, where after derecognition they are no longer shown in the total assets. This follows the logic in Annex II. Section 3.2.5 Instructions concerning specific positions indicating that the exposure column to be filled according to article CRR111 which takes accounting exposure as the starting point. Furthermore, article 92.3 (a) of CRR specifically refers to the CR part of CRR: “(a) the risk-weighted exposure amounts for credit risk and dilution risk, calculated in accordance with Title II and Article 379..” However, an alternative interpretation makes reference to CRR 92.4(a) which states that risk exposure amounts shall be calculated in respect of all business activities and following this approach exposures are reported in COREP under Annex II. Section 3.2.5 Instructions concerning specific positions and mitigated assuming that the price received for the economic interest of the loan is a collateral and mitigates the exposure to zero.