The most prominent among the modifications introduced through CRR III is the treatment of exposures secured by immovable property, which has seen an overhaul in the determination of the respective risk weight based on the exposure-to-value (ETV) ratio using either the loan-splitting approach or the whole-loan approach.

Moreover, banks will have to assess, and meet, various qualitative criteria, including the completion status of the property serving as collateral and legal enforceability of the collateral, as well as prudent valuation criteria, amongst others.

The approach used to determine the respective risk weight depends on the type of property (residential vs. commercial), as well as whether the exposure is considered as an Income Producing Real Estate (IPRE) exposure or not. Whilst for the loan-splitting approach a preferential risk weight will apply up to 55% of the property value, 20% for residential and 60% for commercial property, a risk weight directly linked to the ETV of the property serving as collateral will be assigned under the whole loan approach, namely for exposures that are classified as IPRE.

CRR III has also replaced the current treatment of speculative immovable property financing as ‘Items associated with particularly high risk’, with a new exposure class referred to as land acquisition, development and construction (ADC), for which specific requirements are laid down. This exposure class has also widened to include any development or construction of residential or commercial property undertaken by corporations or special purpose entities.

To reduce dependence on external credit ratings, banks must now carry out an independent internal assessment to assess whether higher credit risk than that implied by the external rating is identified, with the exceptions of certain exposure classes, such as central governments, public sector entities and international organisations. If the internal assessment results in higher risk characteristics than that implied by the credit quality step based on the external rating, a higher credit quality step must be assigned.

A new methodology for assigning risk weights to unrated institutions has been introduced, which previously relied on the external rating assigned to the central government of the country of residence of the institution. 

Depending on the internal assessment performed on the institution and its adherence to prudential requirements, banks shall assign exposures to institutions to one of three grades- Grade A, B or C - each corresponding to a different risk weight (which may also differ depending on the original maturity of exposures). Risk weights for institutions will vary between 30% and 150%.

Off-balance sheet exposures are assigned a Credit Conversion Factor (CCF) between 10% and 100%, based on the item’s characteristics – thus increasing unconditionally cancellable commitments, which were previously allocated to this bucket, from 0% to 10%, with full phase-in expected on 1 January 2033. In addition, a new bucket of 40% has been introduced, which shall include commitments and other off-balance sheet items which previously were assigned within the 20% or 50% buckets.

An array of other amendments have also been introduced, including:

• Specialised lending, a sub-segment of the corporate exposure class under the SA-CR, comprising exposures meeting the definition of either project finance, object finance or commodities finance;

• Equity exposures, for which a base risk weight of 250%, as opposed to 100% under CRR II, now applies;

• Retail exposure class, for which a new category of transactor exposures, such as credit cards and overdrafts, has been introduced, to which a risk weight of 45% is applicable; and

• Subordinated debt exposures, a new exposure class which will carry a risk weight of 150%.