New banking guidelines ease risk weight rules for smaller firms

The European Banking Authority (EBA) has published its final guidelines on proportionate retail diversification methods under the Capital Requirements Regulation.

The guidelines establish a harmonised framework for assessing retail portfolio diversification, while ensuring a proportionate application for smaller institutions.

Under the new framework, institutions seeking to benefit from the preferential 75 per cent risk weight for retail exposures must demonstrate that their retail portfolios are sufficiently granular.

As a starting point, no single exposure to a counterparty or group of connected clients should exceed 0.2 per cent of the total eligible retail portfolio.

Recognising that smaller institutions may not always be able to comply consistently with this benchmark, the guidelines introduce an additional approach designed to preserve proportionality.

Under this alternative, institutions may still apply the preferential risk weight even if they exceed the baseline benchmark, provided that no more than 10 per cent of their eligible retail portfolio exceeds the 0.2 per cent threshold.

In its earlier consultation paper, the authority presented two alternative approaches for assessing diversification, namely an iterative method proposed as the baseline option and a one-step alternative.

In the final text, the authority opted for the one-step approach to ensure proportionality and reduce operational burden, thereby simplifying implementation for institutions.

The diversification threshold was raised from 5 per cent to 10 per cent compared with the original consultation proposal, reflecting feedback from the industry.

This adjustment is intended to ease the impact on small and medium-sized institutions while maintaining sound prudential safeguards within the regulatory framework.

The guidelines also clarify the treatment of securitised retail exposures, drawing a distinction between the diversification assessment applicable when institutions act as originators and when they act as investors.

For institutions acting as investors, a limited and temporary derogation is introduced where obligor-level information is not available under the applicable transparency templates.

In such cases, the diversification condition may be deemed fulfilled, allowing institutions to apply the preferential treatment despite the absence of detailed obligor-level data.