Draft Regulatory Technical Standards on equivalent mechanism for unfinished property

General Information

This document is a draft Regulatory Technical Standards (RTS) published by the European Banking Authority (EBA) in 2025. It specifies the criteria of an equivalent legal mechanism ensuring completion within a reasonable timeframe of real estate under construction, in accordance with Article 124(14) of Regulation (EU) 575/2013 (CRR). The scope covers exposures secured by mortgages on residential real estate under construction in the European Union, with a focus on completion guarantees and associated prudential requirements.

Executive Summary

The document addresses the application of Article 124(3)(a)(iii) of the CRR which allows preferential prudential treatment for exposures secured by residential real estate under construction, under certain conditions. The EBA is mandated to define what constitutes an equivalent legal mechanism ensuring completion of constructions within a reasonable timeframe. This RTS establishes a harmonized European framework that notably recognizes legally required completion guarantees in certain countries, provided they meet strict criteria of applicability, effectiveness, and guarantor solvency. The guarantor must be a regulated entity (financial institution or insurance) with a maximum risk weighting of 20% on the direct exposure. The guarantee must cover all dwellings in the project, be enforceable without additional conditions, and remain valid until completion. The RTS aims to ensure comparability of capital requirements and a level playing field in the EU. The impact analysis favors an alternative approach based on completion guarantees, better suited to European reality than mere public intervention, which is almost non-existent. Public consultations confirm the rarity of recourse to public authorities to complete constructions, while completion guarantees are common in some countries (France, Luxembourg, Belgium). The document also responds to comments by specifying activation conditions of guarantees, the role of entities within the same group, and the prudential solvency threshold of guarantors.

Context and Objectives

Article 124(3)(a)(iii) of the CRR extends preferential prudential treatment to loans secured by residential real estate under construction, under two conditions: either the property is the borrower's primary residence with a maximum of four dwellings, or a public entity or an equivalent legal mechanism guarantees completion within a reasonable timeframe. However, the first hypothesis is the most common, the second (public intervention) being almost non-existent in the EU. The document therefore aims to precisely define what constitutes an equivalent legal mechanism, notably completion guarantees, to allow financial institutions to apply preferential prudential treatment within a harmonized framework. The stakes are legal certainty, mitigation of non-completion risk, comparability of capital requirements, and competitive fairness within the European market. The scope excludes commercial properties and focuses on loans to individuals for residential real estate under construction.

Summary of Key Points by Theme

Definition of the equivalent mechanism: The RTS specifies that the equivalent mechanism is a completion guarantee provided by a guarantor having the legal powers and financial capacity to ensure completion within a reasonable timeframe. This guarantee must be legally mandatory in the concerned country and meet strict execution conditions (p. 3-7).

Requirements on the guarantor: The guarantor must be a financial institution or insurance company subject to prudential requirements, with a maximum risk weighting of 20% on the direct exposure related to remaining construction costs. If the guarantor and lender belong to the same group, preferential treatment applies only at the individual level, not consolidated (p. 5-9).

Guarantee conditions: The guarantee must cover all dwellings in the project, be enforceable without additional conditions (notably without waiting for borrower default), and remain in force until completion. It must provide either full financing of remaining costs or immediate financial compensation equivalent to the amount due by the borrower. Clauses allowing unilateral cancellation or reduction by the guarantor are prohibited, except in cases of force majeure covered by another insurance (p. 5-10).

Impact analysis and policy options: Two options were studied: (a) recognition of a public counter-guarantee, rare in Europe, and (b) recognition of private completion guarantees with strict conditions. Option (b) is preferred as more applicable and adapted to existing national practices, notably in France, Luxembourg, and Belgium (p. 11-13).

Public consultation: Feedback confirms the rarity of direct public intervention and the frequency of private completion guarantees. Adjustments were made to better regulate guarantee activation, minimum guarantor solvency, and the possibility for a guarantor belonging to the same group as the lender to issue the guarantee, with limits on consolidated treatment (p. 14-18).

Main Results and Lessons Learned

Established facts:

- Direct public intervention to guarantee completion of constructions is almost non-existent in the EU (p. 14).

- Completion guarantees issued by regulated financial entities are common in France, Luxembourg, and Belgium, and provided for by national law (p. 14).

- The RTS defines precise criteria for these guarantees, including full coverage of remaining costs, absence of activation conditions, and validity until completion (p. 5-10).

Assumptions:

- The minimum solvency of guarantors is set at a maximum risk weighting of 20%, corresponding to a high credit level, to ensure prudent equivalence with public guarantees (p. 5, 16).

Interpretations:

- The option based on private completion guarantees is more suitable and applicable than that relying on public counter-guarantees, which are scarce (p. 12-13).

- Recognition of guarantees issued by entities within the same group as the lender is possible but limited to the individual level to avoid double counting of risk (p. 5, 17-18).

Uncertainties:

- The notion of "reasonable timeframe" for completion is not precisely defined in the RTS and must be assessed case by case (p. 17).

- Precise quantitative impacts on capital requirements remain qualitative, without detailed quantification (p. 11).

Conclusions and Recommendations

The EBA concludes that recognition of an equivalent legal mechanism based on completion guarantees issued by regulated financial entities, meeting strict solvency and execution criteria, is the best option to ensure harmonized prudential treatment of exposures secured by residential real estate under construction in the EU. This framework ensures project completion within a reasonable timeframe, reduces risks for lending institutions, and guarantees comparability of capital requirements. The RTS recommends that these guarantees be legally mandatory in the concerned country, cover all dwellings in the project, be activatable without additional conditions, and remain valid until completion. It is also recommended to limit consolidated recognition of guarantees issued by entities within the same group as the lender. This regulation will enter into force upon its publication in the Official Journal of the EU (p. 6-10, 14-18).