a) Whole loan approach (Art. 124-5c)
In the case another institution holds a senior lien and a junior lien is held by the institution, for calculating the LTV ratio for the junior lien, its loan amount must include all other loans with liens of equal or higher ranking. If there is insufficient information on the ranking of other liens, they are considered as pari passu with the junior lien held by the institution.
The “base” risk weight corresponding to that LTV must then be multiplied by 1.25 (unless it corresponds to the lowest LTV bucket, then the multiplier is not applied). The resulting risk-weight after the application of the 1.25 multiplier is capped to the risk weight of the counterparty for GRE and to 150% for IPRE (i.e. the risk weights that would apply if the operational requirements would not met). This capped risk weight is then applied to the amount of the junior lien.
Example 3 – Whole loan approach with multiple liens:
Income producing CRE loan of 300.000€ respecting the operational requirements and secured by a property valued 950.000€. Another institution holds a pari passu lien on the same property for an amount of 400.000€.
LTV = (300.000+400.000)/950.000 = 74%. The resulting “base” risk weight is 90%. The 1.25 multiplier is applied leading to a risk weight of 90%*1.25 = 112.5% and a RWA = 300.000*112.5% = 337.500€
b) Loan-splitting approach (Art. 125-1 and 126-1)
When applying the loan-splitting approach, the part of the exposure up to 55% of the property value should be reduced by the amount of any senior or pari passu liens not held by the institution.
In other words: when the institution holds a junior lien and there are senior or pari passu liens not held by the institution, when the value of all liens exceeds 55% of the property value, the amount of the junior lien held by the institution that is eligible for the 20% risk weight is calculated as: max(55% of the property value – amount of the senior or pari passu liens ; 0). When the value of all liens does not exceed 55%, the 20% risk weight is applied to the junior lien exposure.
Example 4 – Loan-splitting approach with multiple liens
General RRE loan of 85.000€ to an individual borrower respecting the operational requirements and secured by a junior lien over a property valued 250.000€ at origination. Another institution holds a senior lien on the same property for an amount of 100.000€. The secured part of the loan is calculated as max(55%*250.000 - 100.000 ; 0) = 37.500€. The unsecured part of the loan is 85.000 – 37.500 = 47.500€. The 20% risk weight applies to the secured part and the risk weight of the counterparty (75% for an individual) to the unsecured part, leading to a RWA = 37.500*20% + 47.500*75% = 43.125€