EBA proposes new risk weights for specialised lending
The European Banking Authority (EBA) has launched a consultation on amendments to regulatory technical standards for assigning risk weights to specialised lending exposures. The proposed changes aim to align with CRR3, integrate ESG factors, and streamline application.
Three drivers for regulatory change
The European Banking Authority is mandated by Regulation (EU) No 575/2013 (CRR) to develop draft regulatory technical standards (RTS) for assigning risk weights to specialised lending exposures.
These exposures, defined in Article 147(8) CRR, relate to entities financing physical assets, where repayment primarily depends on income generated by those assets, with lenders having significant control.
The current amendments to Delegated Regulation (EU) 2021/598 are driven by three main factors.
First, alignment with Regulation (EU) 2024/1623 (CRR3), particularly regarding new definitions and terminology.
Second, the integration of environmental, social, and governance (ESG) factors into the assessment criteria.
Third, enhancing a simplified and harmonised application of assessment criteria based on accumulated supervisory experience.
A framework in evolution
Under the Internal Ratings Based (IRB) Approach, institutions may assign supervisory risk weights and expected loss values based on maturity and classification into five credit risk categories, known as the Supervisory Slotting Criteria Approach (SSCA).
For SSCA classification, institutions assess five factors: financial strength, political and legal environment, transaction/asset characteristics, sponsor/developer strength, and security package.
Delegated Regulation (EU) 2021/598 provides detailed criteria for categories like project finance and real estate.
While SSCA coverage is currently low in most Member States, CRR3 amendments allowing IRB approval at the individual exposure class level could broaden its future application.
Crucial update for a niche tool
This consultation addresses crucial updates to a niche but important regulatory area for specialised lending.
Integrating ESG factors and aligning with CRR3 are significant steps towards ensuring consistency and future-proofing the framework.
However, the historically low usage of the SSCA raises questions about the practical impact of these detailed amendments, despite their technical necessity for regulatory completeness.