Factors

Article 1 of the RTS contains different types of factors that must be taken into account when assessing the appropriateness of risk weights (as defined in article 124(2) of the CRR). These factors arise from the determination of loss experience values and loss expectations.

In the case of risk exposures secured by real estate liens, loss experience values are established in accordance with article 124(2), subparagraph 1 of the CRR: (a) in the case of residential property, on the basis of the losses reported in accordance with article 430a(1), point (a) of the CRR and the risk exposure values reported in accordance with article 430a(1), point (c); and (b) in the case of commercial property, on the basis of losses reported in accordance with article 430a(1), point (d) of the CRR and the exposure values reported in accordance with article 430a(1), point (f).

Under article 1(1), point (b) of the RTS, loss expectation means an accurate estimate of losses that will occur during a specified time horizon. This time horizon ranges from a minimum of one year to three years.

Article 1(2) of the RTS provides that the designated authorities under article 124(1a) of the CRR are responsible for determining the loss expectation.

According to article 1(3) of the RTS, such loss expectation is based on historical developments and the cyclical nature of the real estate market, on its past and present structural features and on data indicators and qualitative information on the fundamental determinants of supply and demand. In addition, the loss expectation is based on the risk exposure of risk positions secured by real estate, which is measured using a range of data indicators including standard indicators used in real estate segments of the member state or regions within its territory. Additional elements of the loss expectation are the expected development of real estate market prices, market volatility and meaningful key macroeconomic variables, the respective time horizon, country-specific features of the real estate market and other data indicators that provide insight into forward-looking real estate market developments.

Conditions

In addition, the Regulation contains conditions to be taken into account when assessing the adequacy of minimum LGD values in accordance with article 164(6) of the CRR for exposures secured by real estate.

These conditions include supply and demand in real estate markets, fluctuations in real estate prices, conditions that have an impact on the determinants of LGD estimates, and other conditions that have an indirect impact on the value of collateral and are taken into account in LGD estimates.

In determining these conditions, authorities should also take into account the links between macroeconomic imbalances and economic downturns and the possible impact of the latter, macroprudential measures to address identified systemic risks, and the degree of uncertainty related to the real estate market. In addition, country-specific features of the real estate market and its financing, and benchmark comparisons of LGD estimates across credit institutions or individual member states need to be taken into account.

Real estate segments and regions within the territory of a member state

According to article 3 of the RTS, the competent authority may take into account the factors and conditions specified in the Regulation for one or more real estate segments or designated regions of a member state.

Other data sources

According to article 4 of the RTS, the competent authority may also use other data sources when assessing whether or not data collected pursuant to articles 430(1), point (a) and 430a of the CRR is sufficiently detailed. “Other data sources” also includes national ad hoc reporting and credit registers linked to the real estate segment or regional jurisdiction.

Client Alert 2023-046