EBA publishes final guidelines on retail diversification methods under the standardised approach

The European Banking Authority (EBA) has published its final Guidelines on proportionate retail diversification methods under the Capital Requirements Regulation (CRR).

The Guidelines establish a harmonised framework to assess whether retail portfolios are sufficiently diversified, with a focus on proportional application for smaller institutions.

To qualify for the 75% risk weight for retail exposures, institutions must demonstrate that their retail portfolios are sufficiently granular. Specifically, no single exposure to a counterparty or connected group should exceed 0.2% of the total eligible retail portfolio.

Recognising that smaller institutions may not meet this benchmark, the Guidelines allow an alternative: institutions can still apply the preferential risk weight if no more than 10% of their retail portfolio exceeds the 0.2% threshold.

The Guidelines also introduce an approach for assessing diversification, choosing a one-step method over the iterative approach to reduce operational burden. The diversification threshold has been increased from 5% to 10%, reflecting industry feedback and easing impacts on small and medium-sized institutions.

Additionally, the Guidelines clarify the treatment of securitised retail exposures, differentiating between originators and investors. For investors, a limited, temporary derogation is permitted when obligor-level information is unavailable, allowing the diversification condition to be considered fulfilled.

The Guidelines are issued pursuant to Article 123(1) of Regulation (EU) No 575/2013 (CRR), which requires the EBA to specify proportionate diversification methods for retail exposures under the standardised approach.