Credit risk sub-categories
The table below presents a non-exhaustive list of sub-categories for credit risk that competent authorities should consider when relevant.
Credit risk sub-categories | Legal references related to the Legal references/Definitions Assessment areas assessment areas |
Credit concentration risk | The risk that the institution will • Single-name concentrations (including a client or group of connected incur significant credit losses clients as defined for large exposures) stemming from a concentration of • Sectoral concentrations Regulation (EU) 575/2013: Articles exposures to a small group of • Geographical concentrations 129, 170, 171, 184, 207, 209, 395, borrowers, to a set of borrowers • Product concentration 400-401 with similar default behaviour or • Collateral and guarantees concentration Directive 2013/36/EU: Articles 81, to highly correlated financial • Hidden sources of concentration that can materialise under stressed 98 assets and concentrated credit conditions, when the level of credit risk correlation can increase compared risk mitigation to normal conditions |
Counterparty credit risk | • The quality of counterparties and relevant CVAs and the complexity of transactions • The wrong-way risk arising when the exposure to a counterparty is adversely correlated with its credit quality • The exposure to counterparty credit and settlement risks in terms of both current market values and nominal amount, compared to the overall The risk that the counterparty to a credit exposure and to own funds Regulation (EU) 575/2013: Articles transaction could default before • The proportion of transactions processed through financial market 181, 246, Part Three, Title II, the final settlement of the infrastructures that provide payment versus delivery settlement Chapter 6 transaction’s cash flows • The proportion of transactions to central counterparties and the Directive 2013/36/EU: Article 79 effectiveness of loss protection mechanisms for them • The proportion of transactions to central counterparties established in third countries the effectiveness of loss protection mechanisms for them, and how any excessive exposure to non-EU CCPs is reduced • The proportion of non-centrally cleared OTC transactions and the effectiveness of loss protection mechanisms for them |
Credit risk sub-categories | Legal references related to the Legal references/Definitions Assessment areas assessment areas |
• The existence, significance, effectiveness and enforceability of netting agreements | |
Settlement and delivery risk | The risk arising in the case of transactions with debt instruments, equities, foreign currencies and commodities (excluding repurchase Regulation (EU) 575/2013: Articles transactions and securities or 1,92, Part Three, Title V commodities lending and securities or commodities borrowing) remain unsettled after their due delivery date |
Country risk | • The risk of a deterioration in the quality of an institution’s exposures in a specific country (including collective debtor risk – i.e. the default by a large group of debtors), stemming from threats, occurrences, and the escalation of adverse events associated with wars, terrorism, and tensions The risk that the institution will among states and political actors affecting international relations incur credit losses associated to • The degree of concentration within all types of exposures to country the business carried out in a risk, including sovereign exposures, in proportion to the whole specific country due to adverse institution’s credit portfolio (per obligor and amount) circumstances and/or events, • The economic strength and stability of the borrower’s country and its including the impact of track record in terms of punctual payment and occurrence of serious geopolitical events, in the specific default events country • The risk of other forms of sovereign intervention that can materially impair the creditworthiness of borrowers (e.g. deposit freezes, expropriation or punitive taxation) • The transfer risk linked to cross-border foreign currency lending for material cross-border lending and exposures in foreign currencies |
179
Credit risk sub-categories | Legal references related to the Legal references/Definitions Assessment areas assessment areas |
Credit risk from securitisations | • The appropriateness of allocation of securitisation exposures to the banking book and trading book and the consistency with the institution’s securitisation strategy The risks arising from • The rating and the performance of the securitisation tranches held by securitisation transactions in the institution, the nature, composition and quality of the underlying relation to which the credit assets Regulation (EU) 575/2013: Article institutions are investor, • The consistency of the capital relief with the actual risk transfer for 67, Part Three, Title II, Chapter 5 originator or sponsor, including originated securitisations Directive 2013/36/EU: Article 82 reputational risks, such as arise in • Whether there is a clear distinction between drawn and undrawn relation to complex structures or amounts for liquidity facilities provided to the securitisation vehicle products • The existence of contingency plans for Asset-Backed Commercial Paper conduits managed by the institution in the event that an issuance of commercial paper is not possible because of liquidity conditions, and the impact on the total credit risk exposure of the institution |
FX lending risk | • Any non-linear relationship between market risk and credit risk where The additional credit risk arising exchange rates may have a disproportional impact on the credit risk of an from FX lending exposures to institution’s FX loans portfolio such as a material increase in both the unhedged retail and SME outstanding value of debt and the flow of payments to service such debt borrowers and an increase in the outstanding value of debt compared to the value of collateral assets denominated in the domestic currency |
Equity risk in the banking book | • The risk of decline in the value of the institution’s equity investments The risk of loss on financial and ensure that this risk is appropriately captured by the institution’s risk instruments from changes in Regulation (EU) 575/2013: Article framework equities posted in the banking 133 • Where relevant, on participation risk in strategic holdings (both book insurance and non-insurance) |
180
Credit risk sub-categories | Legal references related to the Legal references/Definitions Assessment areas assessment areas |
Real estate risk | The risk of loss due to changes in For immovable properties owned • The risk of decline in the value of the institution’s real estate the market value of real estate by an institution Regulation (EU) investments own assets or of financial 575/2013: • Where relevant, the value of financial instruments linked to real estate instruments linked to real estate Article 134(1) - SA assets (e.g. real estate investment trusts, REITs) assets Article 156 - IRB |
Dilution risk | • Dilution risk for all credit portfolios for which the IRB approach is not adopted, and for those whose dilution risk is deemed immaterial from a portfolio perspective • How exposures that are immaterial within each portfolio or exposure class are factored in the institution’s aggregate dilution risk assessment • Where relevant, whether the risk assessment of exposures to dilution Article 4 (53) of the CRR risk in the acquiring business for merchant payment systems (for example, in the portfolio of contingent liabilities for chargeback positions) is appropriate and based upon a consistent segmentation of the underlying positions in accordance with their key contractual features – i.e. the nature of underlying sales transactions, the timing of processed payments, and the application of standard risk mitigation mechanisms. |
Model risk (for regulatory approved models) | • Monitor whether the institution continues to fulfil the minimum requirements and ensure that related own funds requirements are not underestimated Article 4(1), point (52b) of the CRR Directive 2013/36/EU: Article 3 • The assessment may be based on the insights gained in other supervisory actions, including those carried out in accordance with Article 101 of Directive 2013/36/EU |
181