The EBA publishes its final Guidelines on proportionate retail diversification methods under the standardised approach for credit risk

The European Banking Authority (EBA) today published its final Guidelines on proportionate retail diversification methods under the Capital Requirements Regulation (CRR). The Guidelines provide a harmonised framework to assess whether their retail portfolios are sufficiently diversified, while ensuring a proportionate application for smaller institutions.

To benefit for the preferential 75% risk weight for retail exposures, the Guidelines outline an approach whereby institutions demonstrate that retail portfolios are sufficiently granular. As a starting point, no single exposure to a counterparty or group of connected clients should exceed 0.2% of the total eligible retail portfolio.

Recognising that not all institutions, particularly smaller ones, can consistently meet this benchmark, the Guidelines introduce an additional approach: institutions may still apply the preferential risk weight even if they exceed the baseline benchmark, provided that no more than 10% of their eligible retail portfolio is above the 0.2% threshold.

In the consultation paper, the EBA presented two alternative approaches for assessing diversification: an iterative method proposed as the baseline option, and a one-step alternative. In the final Guidelines, the EBA opted for the one-step approach to ensure proportionality and reduce the operational burden for institutions. The diversification threshold has also been raised from 5% to 10% compared with the consultation proposal, reflecting industry feedback and easing the impact on small and medium-sized institutions while maintaining sound prudential safeguards.

The Guidelines also clarify the treatment of securitised retail exposures, distinguishing between the diversification assessment applicable when institutions act as originators and when they act as investors. For investor institutions, a limited and temporary derogation is introduced when obligor-level information is not available under the applicable transparency templates, allowing the diversification condition to be deemed fulfilled.

Legal basis and background

The Guidelines have been developed pursuant to Article 123(1) of Regulation (EU) No 575/2013 (CRR), which mandates the EBA to specify proportionate diversification methods for retail exposures under the Standardised Approach for credit risk.