EBA · 2024_7079 Rejected question

Interpretation of ‘ The degree of correlation between the value of the assets relied upon for protection and the credit quality of the obligor shall not be too high.’

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
194, para. 4
Topic
Credit risk
Submitted by
Individual
Submitted
2024-05-03
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Question

In Article 194, Quote Institutions may recognise funded credit protection in the calculation of the effect of credit risk mitigation only where the lending institution has the right to liquidate or retain, in a timely manner, the assets from which the protection derives in the event of the default, insolvency or bankruptcy — or other credit event set out in the transaction documentation — of the obligor and, where applicable, of the custodian holding the collateral. The degree of correlation between the value of the assets relied upon for protection and the credit quality of the obligor shall not be too high. Unquote My question is about the aforementioned correlation. If a obligor’s major asset is a very valuable mine asset, and the mine asset is collateralized by a bank as security for a loan, is it eligible for the bank to consider the value of the mine asset for calculating the ‘risk-weighted asset’? The value of the mine asset is valued by independent & renowned evalution agency and it meets with all other regulatory requirements for eligible collateral.

Background

I’ve read through relevant Articles containing the keyword ‘correlation’ and searched in Q&A. However, the definition & interpretation in Article 194 is vague and could be misinterpreted by policy owner in a bank. For instance, the mine asset I mentioned in Question was interpreted as ‘ineligible’ in calculating ‘risk-weighted asset’ in a case I have encountered, as the policy owner deems the obligor owns the mine asset and the mine asset is the major asset under the obligor, and so the performance of the two is highly-correlated.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2024_7079

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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