Assessment of the options and the preferred option(s)

Taking into account proportionality and ensuring strict prudential standards, the assessment considers (i) operational practicability, (ii) risk management incentives, and (iii) comparability across institutions.

Under option a., exposures exceeding the 0.2% granularity criterion are retained in the denominator. The removal of exposures that exceed the 0.2% granularity criterion from the portfolio therefore automatically leads to satisfactory diversification. By applying a non-iterative process, the granularity criterion is only verified once, which avoids circular calculations as the denominator always refers to the original portfolio from which no exposures have been removed. I. Concerning (i): this option can be considered as a proportionate and harmonised approach toward ensuring satisfactory retail diversification.

II. Concerning (ii): from a risk management perspective, this approach could incentivise the construction of artificially large non-granular retail exposures that inflate the denominator as reference is only made to the original portfolio. While incentives for such practices could be limited to a certain extent as the institution would have to bear the cost of such artificial exposure inflation in terms of RWEA, these capital costs might, however, rather not be sufficient for discouraging this regulatory arbitrage, due to being relatively minor compared to the reduction in capital costs for the difference between a 100% risk weight and the preferential retail risk weight, in particular if unconditionally cancellable commitments with only 10% conversion factor are used for this purpose.

III. Concerning (iii): from a comparability perspective, the approach would treat the same portfolios differently for different banks, depending on the existence of excluded exposures, as the reference is always to the original portfolio. While excluding large eligible retail exposures allows bank A to treat the whole remaining portfolio as sufficiently diversified, this remaining portfolio might be identical with the original portfolio of another bank B which, however, would need to exclude additional large eligible retail exposures under option a.

Under option b., exposures exceeding the 0.2% granularity criterion are removed from the denominator. Put differently, the denominator is updated to reflect removed exposures and exposures, which will belong to the eligible retail portfolio. The removal of exposures that exceed the 0.2% granularity criterion from the portfolio does not necessarily lead to satisfactory diversification for the remaining portfolio. For this reason (i.e. updating the denominator), the iterative nature of this option comes into play to determine the retail exposures that are eligible for the preferential risk weight. Generally, it should be noted that, by construction, the resulting granularity is systematically higher with this option than with option a., as the denominator becomes smaller due to the iterative process.

I. Concerning (i): this option can also be considered as a proportionate and harmonized approach toward ensuring satisfactory retail diversification, but its implementation is more complex due to the iterative process. However, since this approach is also based solely on readily available information, the additional burden can be deemed relatively modest.

II. Concerning (ii) and (iii): from a risk management and comparability perspective, this option does not incentivise an artificial inflation of exposures and treats the same portfolios equally as the denominator takes into account the excluded exposures. Following also the feedback received during the consultation, the retained option is option a., as it provides a proportionate, operationally simple, and harmonised approach, while still ensuring satisfactory retail diversification with acceptable prudential safeguards for exposures to be granted a preferential risk weight of 75% as set out under Article 123(1) of the CRR.

1. Oversigt

1.1 Referencer

1.2 Identificerede krav

1.3 Relaterede standarder

2. Identificerede krav

3. Relaterede standarder

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