The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU. As part of this effort, EBA has recently launched a consultation on the draft regulatory technical standards on off-balance sheet items under the standardized approach of credit risk. These proposed standards are part of the revised Capital Requirements Regulation (CRR3), with the comment period ending on June 04, 2024.
Under the standardized approach of credit risk, the exposure values of off-balance exposure depend on the application of certain percentages, which in turn depend on a bucket classification. The CRR3 is set to introduce amendments to update the calibration of applicable percentages, which results in the introduction of an adjusted weighting scheme and an additional bucket, increasing the number of risk buckets from 4 to 5, and the conversion factor possibilities to 10%, 20%, 40%, 50%, or 100%. These draft regulatory technical standards provide the criteria that institutions shall use to classify off-balance sheet items, unless explicitly specified in the Level 1 text (Annex 1 of CRR).
These standards also specify the factors that may constrain the ability of institutions to cancel the unconditionally cancellable commitments. The following factors may constrain the ability of institutions to cancel the unconditionally cancellable commitments referred to in point (b) of Article 111(8) of CRR (Regulation No 575/2013):
- Deficiencies in the risk management procedures, including shortcomings in the credit risk monitoring framework and in the IT systems and processes.
- Commercial considerations aimed at avoiding negative impacts on the creditworthiness of the clients or on the business relationship with the clients.
- Reputational risks, whereby commitments are not being cancelled by the institutions with a view to avoid creating a potential negative perception vis-a-vis market-participants.
- Litigation risks
The final report on the draft regulatory technical standards is expected to be delivered one year after the entry into force of the CRR3 regulation. These standards are part of phase 1 of the EBA roadmap on the implementation of the EU banking package.
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