(1)

Under the Internal Ratings Based Approach (‘IRB Approach’), for specialised lending exposures in respect of which an institution is not able to estimate PDs or the institutions’ PD estimates do not meet certain requirements, institutions are to assign risk weights to specialised lending exposures in accordance with Article 153(5) of Regulation (EU) No 575/2013 by attributing them to one of the categories in Table 1 set out in the first subparagraph of Article 153(5) based on their assessment of the specialised lending exposure against each of the factors referred to in its second subparagraph. In order to ensure a harmonised approach to the assignment of the specialised lending exposures to categories, it should be laid down how those factors are to be taken into account by providing for a calculation of values on the basis of which the factors can be linked to the risk categories of that Table. As the specialised lending exposures belong to the corporate exposure class within the IRB Approach and as the method for assigning risk weights to such exposures specified in Article 153(5) of Regulation (EU) No 575/2013 is a form of rating system, the regulatory technical standards for assigning risk weights to specialised lending exposures set by this Regulation should apply in addition to the general rules concerning the assignment of risk weights to corporate exposures and other requirements with regard to rating systems under the IRB Approach.

(2)

In order for the institutions to adequately apply each of those factors, they should be further specified in the form of sub-factors with a view to clarifying the assessment criteria for each situation. In order to adequately assess the sub-factors, it is necessary to further specify some sub-factors in sub-factor components.

(3)

In order to reflect the internationally agreed standards on assigning risk weights to specialised lending exposures, as specified by the Basel Committee on Banking Supervision in the Basel II framework (2), and to take into account the large number of variations in specialised lending exposures, different assessment criteria should be applied to each of those classes of specialised lending exposures when applying the factors. Before assigning a risk weight to a specialised lending exposure, institutions should determine to which of those classes the specialised lending exposure most closely corresponds.

(4)

Where an obligor is in default, institutions should assign the risk weight category 5 in Table 1 of Article 153(5) of Regulation (EU) No 575/2013 and the highest expected loss category, i.e. category 5 in Table 2 of Article 158(6) of that Regulation, to the specialised lending exposure in line with the Basel II framework.

(5)

The attribution by the institutions of a category to each factor should be done on the basis of an overall assessment taking into consideration the categories attributed to the sub-factors of the factor as well as the relative importance which each sub-factor has for the type of specialised lending exposure. The same procedure should be followed when attributing a category to sub-factors where a sub-factor is further specified in sub-factor components.

(6)

In order to achieve the greatest possible accuracy and consistency in the assignment of specialised lending exposures to categories, the institutions should attribute a weight to each factor having regard to its relative importance for the type of specialised lending exposures and determine the weighted average of the values of the categories which have been attributed to the factors. In order to ensure that the institutions assign these weights in a sufficiently prudent way, a lower and an upper limit should be set for the weight that can be assigned to each factor.

(7)

Under Regulation (EU) No 575/2013 institutions are required to document the assignment of risk weights under the IRB Approach in general. In order to facilitate the verification by the competent authorities of the correct application of the rules on the assignment of risk weights to specialised lending exposures as referred to in the second subparagraph of Article 153(5) of Regulation (EU) No 575/2013, certain specific documentation requirements should be laid down for the assignment of risk weights to those exposures.

(8)

This Regulation is largely based on the internationally agreed standards on assigning risk weights to specialised lending exposures. Given the variety of specialised lending exposures and given the specificities of such exposures, it may not capture all risk drivers which institutions identify in their daily business, either for particular types of exposures within the meaning of point 2 of Article 142(1) of Regulation (EU) No 575/2013 or for individual specialised lending exposures. Given that the institutions are required by Article 171(2) of Regulation (EU) No 575/2013 to take into account all relevant information for assignment of obligors and facilities to grades or pools, the institutions should be required to take into account each of any additional risk drivers and consider it jointly with the sub-factor of the specialised lending exposure framework which most closely corresponds to the risk driver. Where this is done for an individual specialised lending exposure, it should be considered an override for the purposes of Article 172(3) of Regulation (EU) No 575/2013. The institution should document why it was appropriate to take into account additional risk drivers and provide a justification for it.

(9)

The provisions on the application of overrides in the IRB Approach also apply to specialised lending exposures. Therefore, the institutions are allowed, exceptionally, not to apply a certain sub-factor or sub-factor component, for an individual specialised lending exposure, where they find it not to be relevant. Institutions should also be allowed, exceptionally, not to apply a certain sub-factor or sub-factor component for all specialised lending exposures belonging to a type of exposures as defined in point (2) of Article 142(1) of Regulation (EU) No 575/2013 when that sub-factor or sub-factor component is not a relevant risk driver for that type of specialised lending exposures. The institutions should be required to document the decision not to apply a sub-factor or a sub-factor component and to provide a justification for it.

(10)

The institutions should be allowed a sufficient period of time to adapt their rating systems for assigning risk weights to specialised lending exposures in order to comply with the rules laid down in this Regulation.

(11)

This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority.

(12)

The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (3),