The European Banking Authority has launched a consultation on draft Guidelines on certain types of exposures and the circumstances in which they can be categorized as being associated with high risk for regulatory capital purposes. The Capital Requirements Regulation provides that when firms use the Standardised Approach for determining minimum capital requirements for credit risk, risk weightings must be allocated to an exposure, based on its exposure class. One of the exposure classes is "exposures associated with particularly high risk," which are: investments in venture capital firms or private equity, speculative immovable property financing and investments in Alternative Investment Funds where the fund's mandate allows a higher leverage than required in the UCITS Directive. An exposure that is of particularly high risk receives a risk weight of 150%.

The EBA's mandate is to prepare guidelines on the types of exposures other than those set out in the CRR that must be associated with particularly high risk and under which circumstances. The EBA's draft Guidelines aim to implement that mandate by specifying that firms should classify exposures as items of high risk where the exposure has a "high risk of loss due to being structurally different from common exposures of the same asset class." The EBA provides a list of those exposures that would fall within the scope of this category.

The EBA is also proposing guidance on the conditions to be met in order for investments in venture capital firms and private equity to be classed as high-risk exposures. The EBA considers that harmonized guidance on this point will be helpful to firms and supervisors.

The EBA notes that the revised Standardised Approach for credit risk agreed by the Basel Committee on Banking Supervision in December 2017 does not include provisions on higher risk exposures. The Basel III revisions are due to be implemented by 2022. The EBA considers that the Guidelines are still needed to detect high risks in banks under the current framework.

The consultation closes on July 17, 2018.

View the consultation paper.

View the response template.

View details of the Basel III revisions.