Sustainable finance regulation: Article 501a of the Capital Requirements Regulation

Hello and welcome to the latest in our series of videos on sustainable finance. I’m Hannah Meakin and I’m going to talk about Article 501a of the Capital Requirements Regulation.

This is part of a package of measures known as the ‘CRR Quick Fix’ which was made in response to the COVID-19 pandemic in order to try and mitigate the impact it will have on the European economy, and, importantly, Article 501a was brought into effect a year earlier than originally planned in order to enable banks to use it as soon as possible.

So, what does it do? Well, it permits banks to multiply the own funds requirements for credit risk in relation to certain exposures by 0.75 percent. The exposures to which it applies are those two entities that operate or finance physical structures, or facilities systems or networks that provide or support essential public services. They must also satisfy a number of other criteria and these include a requirement that there has been an assessment that the infrastructure project being financed contributes to certain environmental objectives. The way that those environmental objectives are described is very similar, but not quite the same, as the way they are described in the Taxonomy Regulation.

We think this is a really important development because it will enable banks to reduce the amount of capital they need to hold in relation to existing portfolios, which means they can free up capital to lend to more such projects, and it may even make those new projects less expensive. However, in order to use this supporting factor, each exposure needs to be assessed against the full list of criteria and there’s no guidance as to what these criteria mean in practice and so the first thing that banks will need to do is to decide how to interpret them. Then they will need to apply them against each of their loans in such a way that they can demonstrate why and how they have reached their conclusions. This could be quite a big exercise because they will need to gather together all of the relevant facts and documents in relation to each of their exposures and it could also involve quite a number of people with different expertise because the tests cover a number of different areas. In addition, many of the tests are quite subjective and so they will require certain judgements to be made and no doubt banks will want to make sure that those judgments are being made consistently across their portfolios.

Our Transform team has been working together with project finance and regulatory lawyers to assist banks to undertake this review, to organize their data and to make the reporting of conclusions and the keeping of those conclusions up-to-date, easier. We would be delighted to talk to anybody who would like to find out more about Article 501a or the technology tool that we have been developing to help banks to work with it.

Thank you for listening to this video.