European Banking Authority issues final guidelines enabling a 100% risk weight for qualifying residential ADC exposures under the Capital Requirements Regulation

The European Banking Authority has published final Guidelines clarifying when institutions using the standardised approach may apply a 100% risk weight, instead of 150%, to Acquisition, Development and Construction exposures to residential property under the Capital Requirements Regulation. Eligibility for the 100% risk weight hinges on two conditions. First, at least 50% of total contracts must be pre-sale contracts with a cash deposit of at least 10% of the sale price, pre-lease contracts with a cash deposit of at least three times the monthly lease rate, or sale and lease contracts. Second, the obligor must have substantial equity at risk, set at at least 25% of the residential property’s value upon completion, reduced from 35% in the draft after industry feedback and analysis of the 2024 Quantitative Impact Study. For public housing, the Guidelines introduce additional flexibility by allowing the first condition to be met where applicant demand exceeds unit supply, including at municipality level; they also reduce the equity threshold to 20% and broaden eligible equity to include committed subsidies, grants, and preferential junior loans. The Guidelines are part of the first phase of the EBA’s roadmap for credit risk implementation of the EU Banking Package and were developed under Article 126a(3) of Regulation (EU) No 575/2013 as amended by CRR3. The final text is awaiting translation into the EU official languages.