- The “Consultation Paper on Guidelines on Retail Diversification” issued by the EBA, aims to ensure that retail exposures are sufficiently diversified, reducing risk concentration. This diversification is a mandatory requirement for assigning the preferential 75% risk weight under the standardised approach of credit risk. The guidelines aim to harmonize retail diversification assessment across the EU, ensuring comparability and reducing the risk of regulatory arbitrage. The consultation runs until 12 February 2025.
- Recognizing that smaller institutions typically have less diversified portfolios, the EBA proposes a proportionate method. Institutions with exposures exceeding the Basel III criterion (no single exposure above 0.2% of the overall portfolio) may still qualify if no more than 10% of the retail portfolio exceeds this threshold.
- Institutions must identify eligible retail exposures that exceed the 0.2% threshold. If the sum of these large exposures exceeds 10% of the total retail portfolio, the institution may exclude certain large exposures iteratively until the portfolio meets the diversification criterion; Excluded exposures must be risk-weighted according to CRR guidelines, either as retail or as corporate (for SME exposures).
- Alternative Approach. An alternative non-iterative approach is also considered, where the calculation of the 0.2% threshold is performed only once. This method proposes a stricter 5% threshold for large exposures, simplifying the process but potentially reducing the flexibility for institutions.
