Harmonised Retail Diversification Framework
The European Banking Authority (EBA) has issued its final guidelines on proportionate retail diversification methods under the Capital Requirements Regulation. These guidelines provide a unified framework for assessing retail portfolio diversification, ensuring that smaller institutions can benefit from a proportionate regulatory approach.
Enhanced Proportionality For Smaller Institutions
Under the guidelines, institutions seeking the preferential 75% risk weight for retail exposures must demonstrate sufficient portfolio granularity. Individual exposures to a counterparty or a group of connected clients should not exceed 0.2% of the total eligible retail portfolio. The framework introduces flexibility for smaller institutions, allowing them to qualify for the preferential risk weight if no more than 10% of the portfolio exceeds the 0.2% threshold.
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Simplified Regulatory Procedures
The EBA initially considered two assessment methods: an iterative baseline approach and a one-step alternative. In the final version, the Authority adopted the one-step approach to simplify implementation and reduce operational complexity. The diversification threshold was also raised from 5% to 10%, reflecting feedback from financial institutions and aimed at reducing disproportionate regulatory pressure on small and medium-sized banks.
Clarified Treatment Of Securitised Retail Exposures
The guidelines also address the treatment of securitised retail exposures, distinctly outlining the criteria for institutions acting as originators versus those acting as investors. For investor institutions, a temporary, limited derogation has been introduced for cases where obligor-level information is unavailable. In such circumstances, the diversification condition may be regarded as fulfilled, thereby permitting the application of the preferential risk treatment despite the lack of detailed data.
