Credit risk: EBA adopts final Guidelines on ADC exposures, ABBL’s advocacy reflected in equity threshold

Clearer conditions for applying a 100% risk weight

The Guidelines set out the precise circumstances under which banks may apply a 100% risk weight – rather than the default 150% – to certain ADC exposures, provided specific credit risk-mitigating conditions are met.

To benefit from this treatment, two conditions must be fulfilled:

• Condition 1: At least 50% of total contracts must be:

  • pre-sale contracts with a cash deposit ≥10% of the sale price; or
  • pre-lease contracts with a deposit ≥3 months’ lease; or
  • sale and lease contracts.

• Condition 2: The obligor must have substantial equity at risk, defined as a minimum 25% of the property’s value upon completion.

In a notable improvement, additional flexibility is granted for public housing projects, which may now meet the first condition when demand exceeds supply, including at the level of a single municipality.

ABBL’s input acknowledged

The ABBL actively contributed to the EBA’s public consultation in July 2024, advocating for more proportionate treatment of ADC exposures. We are pleased to note that one of our key recommendations – to reduce the equity threshold from 35% to 25% – has been reflected in the final text. Although our original proposal called for a 20% threshold, this adjustment represents an important step forward.

We warmly thank the members of the Banking Supervision Committee and the Task Force on the Prudential Treatment of Real Estate Financing for their input and engagement throughout the consultation process.