CRR ‘quick fix’ pushes UniCredit’s RWAs lower

Regulatory relief passed by European policy-makers eased UniCredit’s risk-weighted asset (RWA) burden over the three months to end-June.

Credit RWAs shrank to €302.2 billion ($358.9 billion) from €313.8 billion at end-March. Of the €11.6 billion fall, a net €2.4 billion was due to regulation. Specifically, €4.4 billion was deducted because of the European Union’s decision to fast-track measures that lowered the risk-weights applied to loans to small and medium-sized enterprises (SMEs). This partly offset RWA inflation of €4.9 billion caused by regulatory risk models’ factoring in the effects of the Covid pandemic on client creditworthiness. 

Other ‘quick fix’ changes to the EU’s Capital Requirements Regulation (CRR), including those linked to creditworthiness assessments under accounting standard IFRS 9, may have been responsible for the remainder of the RWA reduction attributable to regulation.

 

Separately, UniCredit saved an additional €9.1 billion of RWAs thanks to the risk-reducing effects of state guarantees on outstanding loans and lower lending volumes.

Market and operational RWAs increased only slightly quarter-on-quarter, by €1 billion and €300 million apiece, meaning overall RWAs were lower on the quarter by 3%. This helped push up UniCredit’s Common Equity Tier 1 (CET1) capital ratio by 110 basis points to 14.54%.

Without the effect of IFRS 9 transitional measures, however, it would have been 13.85%.

 

What is it?

In June, European policy-makers put together a ‘quick fix’ to the CRR governing capital requirements to ease the burden of the coronavirus crisis on the banking system.

IFRS 9 relief was a part of the package, which allows lenders to ‘add back’ 100% of stage one and two expected credit loss provisions incurred since January 1 into their regulatory capital to reduce pressure on their core solvency ratios through the Covid-19 pandemic. The temporary measures apply to end-2021. 

The amendments also ushered in preferential treatment for non-performing loans backed by state guarantees and a more benign regulatory capital treatment for SME exposures.

Why it matters

Preventing RWAs from rocketing up over the course of the coronavirus crisis, which would erode capital ratios, has been a priority across European banks this quarter.

UniCredit had more headroom than most heading into the crisis, having sold most of its stake in Turkish bank Yapi Kredi earlier in the year, netting it €19.7 billion of RWA savings.

Still, the bank continued to cut down exposures over Q2, in spite of the RWA-dampening effects of the CRR ‘quick fix’. This may disappoint policy-makers, who hoped that capital relief measures would incentivise banks to increase lending, rather than pull back.

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• Topics
• Capital Requirements Directive (CRD)
• Common Equity Tier 1 (CET1) capital
• Council of the European Union
• Credit risk
• EEA
• Europe
• European Union (EU)
• G-Sibs
• IFRS 9
• Italy
• Mergers & acquisitions (M&A)
• Risk-weighted assets (RWAs)
• UniCredit
• Risk Quantum
• Banks
• Covid