Applying risk weight in accordance with Article 235(3) of CRR3

In case of exposure and guarantee denominated in different currencies, which currency shall be taken into account in the process of application of risk weight for guaranteed part of exposure in accordance with Article 235(3) of CRR3?

In Regulation (Eu) 2024/1623 Of The European Parliament And Of The Council of 31 May 2024 amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor ("CRR3”) Article 235 paragraph 3 is replaced by the following:  “3. Institutions may extend the preferential treatment set out in Article 114(4) and (7), to exposures or parts of exposures guaranteed by the central government or the central bank as if those exposures were direct exposures to the central government or the central bank, provided that the conditions set out in Article 114(4) or (7), as applicable, are met for such direct exposures”. In accordance with Article 114 paragraphs 4 and 7 of Regulation (EU) No 575/2013 ("CRR”) institution should verify if currency of the exposure to central government (or central bank) is denominated and funded in the domestic currency of that central government (or central bank). In case when currency of the guarantee is different from currency of the exposure, it is not clear which currency should be taken into consideration under CRR3 rules. To obtain risk weight equal 0%, should guarantee be denominated in currency of the central government and should direct exposure be funded in currency of that exposure?  We believe that only in that situation foreign exchange risk of the institution will be mitigated. Moreover, currency mismatch between guarantee and direct exposure will be covered by appropriate FX haircut in accordance with Article 233 paragraph 3 of CRR.