EBA clarifies retail credit risk diversification for banks
The European Banking Authority (EBA) has published its final Guidelines on proportionate retail diversification methods under the Capital Requirements Regulation (CRR). These guidelines provide a harmonised framework for assessing retail portfolios, ensuring a proportionate application for smaller institutions.
New thresholds for risk weights
To qualify for the preferential 75 percent risk weight on retail exposures, institutions must now demonstrate that their retail portfolios are sufficiently granular, as outlined in the new EBA Guidelines.
The core principle establishes that no single exposure to a counterparty or group of connected clients should exceed 0.2 percent of the total eligible retail portfolio.
This benchmark is designed to ensure a broad distribution of risk, preventing over-reliance on a few large retail clients.
However, recognising the structural challenges faced by smaller institutions, the Guidelines introduce a crucial additional approach.
Banks may still apply the preferential risk weight even if they exceed the baseline 0.2 percent benchmark, provided that no more than 10 percent of their eligible retail portfolio is above this threshold.
This flexibility aims to balance prudential safeguards with the operational realities of diverse banking models across the European Union, fostering a more adaptable regulatory environment while maintaining robust risk management standards for the sector.
From consultation to final rules
The final Guidelines incorporate significant adjustments following industry feedback during the consultation phase.
The EBA moved from an initially proposed iterative method to a streamlined one-step approach, aiming to enhance proportionality and reduce operational burden for institutions.
A key change involved raising the diversification threshold from 5 percent to 10 percent compared with the initial consultation proposal.
This increase directly addresses concerns from small and medium-sized institutions, easing the impact of the new rules while maintaining robust prudential safeguards.
Furthermore, the Guidelines clarify the treatment of securitised retail exposures, distinguishing between institutions as originators and investors.
A temporary derogation is introduced for investor institutions when obligor-level information is unavailable, allowing the diversification condition to be deemed fulfilled.
Pragmatic flexibility for smaller lenders
These revised guidelines represent a pragmatic step towards balancing stringent risk management with the diverse operational capacities of European banks.
The increased flexibility for smaller institutions acknowledges their practical challenges without compromising overall financial stability.
This adaptive approach is crucial for fostering a more resilient and inclusive banking sector across the EU.