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Type of collateral = Unsecured This is a subset of the fourth sectoral exposures referred to in Article 133(5)(b) of CRD V. 42. Example 2: assume a country, Y, where 70% of mortgage lending in the residential real estate (RRE) sector is concentrated in its capital city. The real estate market in the capital city is overvalued (in contrast to the rural area) according to national and international studies. At the same time, the low interest rate has increased households’ indebtedness in country Y significantly. In this case, the relevant authority could apply a sectoral SyRB to the following subset: 1. Type of debtor or counterparty sector = Natural persons 2. Type of exposure = Retail exposures 2.a. Risk profile = LTV > 60% and DTI > 4 3. Type of collateral = RRE 3.a. Geography = Capital city This is a subset of the first sector al exposures referred to in Article 133(5)(b) of CRD V. 43. Example 3: assume a country, Z, where 20% of the total lending secured by immovable property is to the domestic agricultural sector. The total stock of lending secured by immovable property in country Z represents more than the country’s GDP. In this country, the agricultural sector is not profitable. Most of the exposures in this sector are to highly indebted debtors that at the same time are highly sensitive to interest rate hikes. For country Z, this subset of exposures poses a systemic risk. The relevant authority could apply a sectoral SyRB to the following subset: 1. Type of debtor or counterparty sector = Non-Financial corporations 1.a. Economic activity = NACE A 2. Type of exposure = All exposures under loans and advances 2.a. Risk profile = Debt-to-EBITDA ratio > 4 3. Type of collateral = CRE This is a subset of the second sectoral exposures referred to in Article 133(5)(b) of CRD V. 44. Example 4: assume a country, W, where the total outstanding of corporate bonds amounts to EUR 500 billion, representing 20% of the country’s GDP. Almost 50% of these bonds are held by the domestic banking sector. Because of the low interest rate environment, which has persisted for many years, the share in the banks’ balance sheet of corporate bonds at the bottom tier of investment grade has increased from 10% to 40%. In the event of a recession, the losses from such holdings could destabilise the domestic banking sector. The relevant authority could apply a sectoral SyRB to the following subset: 1. Type of debtor or counterparty sector = Non-financial corporations 2. Type of exposure = All exposures under debt securities 3. Type of collateral = Unsecured This is a subset of the third sector al exposures referred to in Article 133(5)(b) of CRD V. 45. Example 5: assume a country, P, where household indebtedness is relatively high and vulnerabilities in the housing market are significant. Furthermore, country P is characterised by a large share of banks using IRB models. The share of mortgage lending in the residential real estate is significant at the country level, while the average risk weights are below those of EU peers. In this case, the relevant authority could apply a sectoral SyRB to the following subset: 1. Type of debtor or counterparty sector = Natural persons 2. Type of exposure = Retail exposures 2.a. Risk profile = (Average) risk weight < 20% 3. Type of collateral = RRE This is a subset of the first sectoral exposures referred to in Article 133(5)(b) of CRD V. 46. Example 6: assume a country, Q, where the banking sector is characterised by a balance sheet with low credit quality. In this country, the interest rate has been low for many years creating structural vulnerabilities. In the event of an interest rate hike in the future, the risk of a resurgence of non-performing loans could pose serious systemic risks to country Q. In this case, the relevant authority could for preventive reasons apply a sectoral SyRB to the following subset: 1. Type of debtor or counterparty sector = Non-financial corporations 2. Type of exposure = All exposures 2.a. Risk profile = Non-performing (ratio) > 5% 3. Type of collateral = CRE This is a subset of the second sectoral exposures referred to in Article 133(5)(b) of CRD V.
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