The European Banking Authority (EBA) today published its final draft Regulatory Technical Standards (RTS) on the allocation of off-balance sheet items and the specification of factors that might constrain institutions’ ability to cancel unconditionally cancellable commitments considerations.
Under the standardised approach of credit risk, the exposure values of off-balance exposure depend on the application of certain percentages, which in turn rely on a bucket classification. With these draft RTS the EBA introduced assignment criteria for off-balance sheet items not already assigned to any buckets in line with the Annex I of the Capital Requirements Regulation (CRR). These assignment criteria aim at distinguishing between different levels of conversion probability, leveraging on the existence of financial covenants, conditions related to non-credit related events, and the optionality the obligor has in drawing or not the off-balance sheet item. Furthermore, the EBA provided non-exhaustive list of examples to support institutions in classifying their off-balance sheet items.
the final draft RTS also introduce four factors to be considered as constraining institutions’ ability to cancel an unconditionally cancellable commitment that relate to risk management processes, commercial considerations as well as to reputational and litigation risks.
Finally, the EBA proposed to implement the notification process of off-balance sheet items not already included in Annex I via the COREP framework to minimise the reporting burden.
Legal basis and background
The draft RTS have been developed according to Article 111(8) of Regulation (EU) No 575/2013 (CRR).
Article 111 of the CRR sets out the provisions to determine exposure values under the Standardised Approach for Credit Risk, including the specification for off-balance sheet items, where exposure values are derived from nominal values and the application of certain percentages. The applicable percentage for any off-balance sheet item is derived via a mapping into five buckets specified in Annex I of the CRR. Those percentages are related to the likelihood that an off-balance sheet item exposes the institution to the risk of credit losses in case of a default.
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