Amending RTS on the assessment of appropriateness of risk weights and minimum LGD values

General Information

This document is a final report published in 2025 by the European Banking Authority (EBA). It concerns a draft amended regulatory technical standards (RTS) on the assessment of the adequacy of risk weights and minimum loss given default (LGD) values for exposures secured by immovable property. The scope covers real estate exposures under the standardized credit risk approach, as well as LGD values for retail exposures secured by immovable property, within the framework of Regulation (EU) No 575/2013 (CRR) amended by CRR3. The document comprises 15 pages and addresses the factors to be considered by designated national authorities for the assessment of risk weights and minimum LGDs, as well as the necessary adjustments to align the RTS with recent regulatory changes.

Executive Summary

The main subject is the amendment of regulatory technical standards (RTS) relating to the assessment of the adequacy of preferential risk weights and minimum LGD values for exposures secured by immovable property, in accordance with CRR3 requirements. This subject is crucial as it ensures that national authorities have harmonized and clear criteria to assess real estate risks, contributing to financial stability and regulatory consistency within the European Union. The main findings indicate that the changes introduced by CRR3, notably the introduction of specific treatments for income-producing real estate (IPRE) exposures and acquisition, development and construction (ADC) exposures, do not affect the relevance of the factors to be considered in the existing RTS. Consequently, the EBA proposes to maintain the factors defined in Delegated Regulation (EU) 2023/206 unchanged, proceeding only to update legal references to align with CRR3, notably by replacing the term “minimum LGD values” with “LGD input floor values” at the individual exposure level. Recommendations include submitting these amended RTS to the European Commission for approval, with entry into force planned shortly after their publication in the Official Journal of the European Union. This approach ensures regulatory continuity and coherence while integrating recent legislative developments.

Context and Objectives

The document responds to a regulatory obligation stemming from Article 124(11) of CRR3, which mandates the EBA, in cooperation with the European Systemic Risk Board (ESRB), to develop RTS specifying the factors that national authorities must consider to assess the adequacy of preferential risk weights for real estate exposures under the standardized approach. This task follows a previous RTS adopted under CRR2, which already defined the methods for calculating historical losses and the forward-looking factors to be considered. CRR3 introduced significant changes, notably more risk-sensitive risk weights for certain real estate exposures, as well as specific treatments for ADC and IPRE exposures. The main objective is to ensure that the RTS remain relevant and aligned with these developments, while guaranteeing maximum harmonization, convergence of supervisory practices, and legal clarity. The scope covers residential and commercial real estate exposures, as well as retail exposures secured by immovable property. The limitations concern the fact that the RTS do not modify the specific levels of risk weights, but only the factors to be considered in their assessment.

Summary of Key Points by Theme

Risk Weight Assessment: National authorities must annually assess the adequacy of preferential risk weights for exposures secured by immovable property, relying on historical losses calculated according to harmonized reporting requirements (Article 430a CRR) and on forward-looking elements including real estate price developments, volatility, structural market characteristics, supply and demand, as well as relevant macroeconomic variables (p. 4). Forward-Looking Factors: A prudence margin is required in case of high uncertainty on forward-looking factors, notably real estate price volatility and macroeconomic risks (p. 4). Treatment of Specific Exposures: CRR3 introduces more conservative risk weights for IPRE exposures when certain conditions are not met, as well as a dedicated treatment for ADC exposures with a risk weight of 150%, except under specific conditions for a preferential rate (p. 5-6). These exposures are not eligible for the preferential risk weights under Articles 125 and 126 CRR. Standardized Approach and Calibration: The document confirms that the RTS remain neutral regarding specific levels of risk weights, focusing solely on the factors to be considered, regardless of calibration methods such as loan splitting or the whole-loan approach based on the loan-to-value (LTV) ratio (p. 6). Regulatory Alignment: Proposed amendments mainly aim to update legal references in the RTS to reflect CRR3 changes, notably replacing the concept of “minimum LGD values” with “LGD input floor values” applied at the individual exposure level, to ensure regulatory consistency (p. 7-12). Use of Specific Data: Authorities may use additional data, such as national ad hoc reports or credit registers, when harmonized data lack sufficient granularity for certain real estate segments or parts of the territory (p. 12). Public Consultation and Cost-Benefit Analysis: The public consultation received no responses, and the cost-benefit analysis concludes that the proposed changes, being mainly formal, do not entail any significant additional impact (p. 14-15).

Main Findings and Lessons Learned

Findings: CRR3 introduced significant changes in the treatment of real estate exposures, notably more risk-sensitive risk weights for IPRE and a specific treatment for ADC. Existing RTS already define robust factors for the assessment of risk weights and minimum LGDs, including detailed historical and forward-looking criteria (p. 3-7). Assumptions: Current factors remain relevant despite regulatory developments, as the new exposure categories are not eligible for the preferential risk weights targeted by the RTS, and the RTS are independent of specific risk weight calibration (p. 5-7). Interpretations: The EBA considers that the RTS should remain unchanged in their factors to consider, with only an update of legal references for alignment with CRR3, in order to preserve coherence and avoid unnecessary changes in an already recent framework (p. 3, 14). Uncertainties: No major uncertainty has been identified regarding the relevance of the factors to consider. The absence of responses to the public consultation suggests consensus or lack of controversy on the proposals (p. 15).

Conclusions and Recommendations

The EBA concludes that the factors to be considered by national authorities to assess the adequacy of preferential risk weights and minimum LGD values for exposures secured by immovable property should remain unchanged, in accordance with those defined in Delegated Regulation (EU) 2023/206. Only legal references are updated to reflect changes introduced by CRR3, notably the shift from “minimum LGD values” to “LGD input floor values” at the individual exposure level. This approach ensures regulatory consistency and continuity of supervisory practices without burdening the existing framework. The report recommends the prompt submission of the amended RTS to the European Commission for approval, with entry into force planned shortly after their official publication. No substantial modification of the assessment criteria is proposed, given the robustness of the current framework and the absence of feedback during the public consultation.