EBA pushes back on Commission's property risk rule changes
The European Banking Authority (EBA) published its Opinion today, challenging the European Commission's proposed amendments to draft technical standards on residential property risk. The EBA argues two key changes are inconsistent with prudential safeguards.
Defending the 20 percent risk cap
The Commission proposed increasing the cap on the risk weight for protection providers from 20% to 30% under the Standardised Approach.
The EBA firmly believes the original 20% threshold is crucial for maintaining consistency within the prudential framework.
Allowing a 30% risk weight could lead to preferential capital treatment not fully justified by the protection provider's credit quality.
The EBA emphasizes that retaining the 20% cap is essential to safeguard the coherence of the capital framework and to ensure that the mechanism offers robust assurance for property completion.
This stance aligns with the general principle that capital treatment should reflect the counterparty's credit quality.
Legal certainty under threat
The second amendment proposed by the Commission involves removing the requirement that the completion guarantee be mandated by the law of the Member State where the residential property is being built.
The EBA views this requirement as fundamental to classifying the mechanism as a 'legal mechanism' rather than a purely private contractual arrangement.
Its removal, in the EBA's assessment, would diminish legal certainty and dilute the overall robustness of the regulatory framework.
The EBA's Opinion reiterates its commitment to ensuring a harmonised and prudent application of the preferential treatment for residential property exposures, underscoring the importance of legally binding guarantees.