This final report presents guidelines on proportionate diversification methods for retail exposures, in accordance with the CRR regulation. It specifies that retail portfolios must be sufficiently diversified to benefit from a preferential risk weight, adhering to a granularity criterion. Institutions may qualify less diversified portfolios if no more than 10% of their exposures exceed a 0.2% threshold of the…
This document is the final report on guidelines relating to proportionate methods for diversification of retail portfolios, published by the European Banking Authority (EBA) in 2026. It is a 23-page guide specifying the methods to be applied under Article 123(1) of Regulation (EU) No 575/2013 (CRR) to assess diversification of retail exposures within the standardized credit risk approach. The scope covers eligible retail exposures within European financial institutions, particularly retail portfolios where granularity is a key criterion for applying a preferential risk weight of 75%. The document applies from 19 May 2026.
- Subject: The report defines guidelines to assess proportionate diversification of retail portfolios, a necessary condition to apply a preferential risk weight of 75% under the standardized credit risk approach, in accordance with Article 123(1) of the CRR (p. 3).
- Importance: Diversification reduces concentration risk in retail portfolios. The Basel III international framework sets a granularity threshold at 0.2% of the total portfolio per counterparty. The EBA must specify a harmonized European method to assess this diversification, taking into account the size and structure of institutions (p. 3-4).
- Key findings: The EBA proposes a proportionate method allowing institutions whose portfolios are not strictly granular according to the 0.2% threshold to continue benefiting from the preferential risk weight, provided that exposures exceeding this threshold do not represent more than 10% of the total eligible portfolio value (p. 3). This approach harmonizes practices while remaining adapted to small and medium institutions (p. 4).
- Conclusions: The chosen method is a non-iterative diversification test, simple to implement, comparing the share of large exposures (above 0.2%) to the 10% threshold. This choice addresses operational and comparability concerns between institutions (p. 15-17).
- Recommendations: Institutions must apply this test periodically (at least quarterly), both at individual and consolidated levels, and distinguish non-securitized portfolios, securitized as originator, and securitized as investor, with specific modalities for each (p. 7, 12-13). An exemption is provided for securitization investors when counterparty data is unavailable (p. 7, 20).
- The document responds to the mandate given to the EBA by Article 123(1) of the CRR, which requires defining proportionate methods to assess diversification of retail exposures, an essential condition to apply a preferential risk weight (p. 4).
- The Basel III framework imposes a granularity criterion of 0.2% of the total portfolio per counterparty but leaves room for national supervisors to define other methods (p. 4).
- Small institutions often have more concentrated portfolios. These guidelines aim to allow them to benefit from preferential treatment under conditions, respecting the principle of proportionality and ensuring European harmonization (p. 4).
- The objective is to provide a simple method, based on easily accessible data, that guarantees convergence of practices and control of concentration risks (p. 4).
- The scope covers retail exposures defined in Article 123 of the CRR, excluding defaulted exposures, and applies at individual or consolidated level according to the capital requirements calculation (p. 5).
Proportionate diversification method:
- Diversification is assessed by comparing the sum of so-called "large" exposures (above 0.2% of the total portfolio) to the total sum of eligible exposures. The condition is that this share does not exceed 10% (p. 11).
- A "large exposure" is defined at the client or group of connected clients level, summing their exposures (p. 11-12).
- If the initial portfolio does not satisfy the condition, large exposures may be excluded to test diversification of the remaining portfolio. Excluded exposures do not benefit from the preferential risk weight (p. 11-12).
- This method is non-iterative: the 0.2% threshold is calculated once on the initial portfolio, avoiding circular calculations and simplifying implementation (p. 15-17).
Treatment of securitized exposures:
- Three sub-portfolios are distinguished: non-securitized, securitized as originator, securitized as investor (p. 7, 12-13).
- The originator assesses diversification on the combined underlying and non-securitized exposures (p. 7, 12).
- The investor assesses diversification only on the securitized underlying exposures (p. 7, 12).
- An exemption is provided for investors when counterparty information is unavailable in regulatory disclosure models (p. 7, 20).
Frequency and level of application:
- The test must be performed at each reference date, at least quarterly, at individual and consolidated levels according to the capital requirements calculation scope (p. 5, 18).
- The exposure considered is exposure at default (EAD), according to Basel standards (p. 18).
Public consultation and adjustments:
- The consultation revealed a preference for the non-iterative method and a 10% threshold to reduce the burden for small and medium institutions (p. 17-19).
- Requests to reduce frequency or simplify the level of application were not retained, with the EBA emphasizing the importance of regular and CRR-compliant supervision (p. 18-19).
- The treatment of securitized exposures was clarified in response to comments (p. 19-21).
- Established facts: The 0.2% granularity threshold per counterparty is confirmed as a reference, but an aggregated 10% threshold for large exposures is introduced to allow some concentration without losing preferential treatment (p. 3-4, 11).
- Assumptions: The non-iterative method is sufficient to ensure satisfactory diversification and avoid complex calculations (p. 15-17).
- Interpretations: The chosen approach balances proportionality, operational simplicity, and prudential rigor, especially for small institutions (p. 17).
- Uncertainties: Data collected during the consultation are limited and do not cover the entire European sector, which may limit representativeness of estimated impacts (p. 14).
- The EBA acknowledges that the method may penalize some small banks but considers that the 10% threshold mitigates this effect (p. 23).
- The EBA adopts a proportionate diversification method based on a simple, non-iterative test, with a 10% threshold for the share of large exposures (p. 17).
- The test must be conducted quarterly, at individual and consolidated levels, using exposure at default (EAD) (p. 18).
- Securitized portfolios must be evaluated separately depending on whether the institution is originator or investor, with an exemption for investors when counterparty information is missing (p. 7, 12-13, 20).
- Competent authorities must integrate these guidelines into their supervisory practices and notify their compliance to the EBA before 19 May 2026 (p. 10).
- These guidelines apply from 19 May 2026 (p. 11).
- The EBA recommends maintaining the quarterly frequency to ensure continuous monitoring of diversification (p. 18).
- The report emphasizes the importance of harmonized application to guarantee a comparable risk level and fair treatment among institutions in the EU (p. 14-17).
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