The substitution rule in CRR3 applied to national mortgage guarantee (Nationale Hypotheek Garantie) mortgages

On January 1, 2025 the CRR3 went into legal force for most member states of the EU. Of particular consequence is the treatment of mortgage guarantees. A significant portion of the Dutch mortgage market is protected by the so called “Nationale Hypotheek Garantie” (NHG), or national mortgage guarantee. A common practice is to take the NHG into account in the IRB model as a risk driver or calibration segment. However, treating the NHG as Credit Risk Mitigation simplifies the model and leads to favourable risk weights, while also accurately reflecting the credit risk. Treating the NHG as a CRM brings along subtle but important issues. 

NHG is a guarantee that covers 100% (for loans for which the final offer is sent before January 2014) or 90% (for all other loans, see B.1.5 of [1]) of all residual debt after a default. NautaDutilh has tested the legal viability of the NHG and found it qualifies as credit risk protection for the CRR (see [2]). The NHG is provided by the organization WEW an organ of the Dutch state. WEW in turn is financially guaranteed (by the so called “back stop agreement”) by the municipalities relevant to the mortgage (for loans with guaranteed by NHG before 2011-01-01, see [3]), or the Dutch state directly (for the loans guaranteed by NHG later than 2011-01-01). This back stop agreement has also been tested by NautaDutilh and qualifies as CRR compliant credit risk protection. Finally, Dutch municipalities are considered a local government that are treated as exposures to the central government (see [4]). Therefore, mortgages that are protected by NHG benefit from a favorable reduction in risk weights when treated as CRM.  The standardized risk weight for the Dutch central government, as well as its municipalities is 0%.

The B1 section of terms and conditions was updated in 2020 to reflect the obligation of NHG to pay out. This means that the date at which the CRM starts is 31st of March 2020 at the earliest (even for loans with NHG originating before this date), see [1].
 

Using the standardised risk weight for the CRM and the A-IRB approach for the real estate exposure, taking care not to double count the NHG during modelling, leads to the lowest Risk Weights as well as the most accurate assessment of the credit risk. The substitution approach allows the calculation of risk weighted exposure amount (RWEA) using the standardised risk weighting of the guarantor. The typical case that we will examine is a bank that has a real estate portfolio using the IRB approach and IRB model for Public Sector Entities or Central Governments. In these cases, article 235(a) of the CRR gives the following formula:

where:

 the exposure value with the credit conversion factor (CCF) set at 100%;

 the amount of credit protection adjusted for foreign exchange risk, we will assume no foreign exchange risk for this article, this number will be 90% or 100% of the exposure depending on the date the loan was offered to the client;

 the IRB risk weight of the guaranteed exposure;

 the standardised risk weight for the guarantor.

As the section above outlined the g in this formula should be set at 0%. For a NHG exposure of €400.000 with 10 percent IRB risk weight, that originated after 2014, the formula would reduce the RWEA to 1% of €400.000 or €4.000. Please refer to this article for details on how the standardised real estate risk weights work under CRR3.

The approach in this article is made possible by the introduction of CRR article 235a in CRR3. This article introduces the hybrid IRB (for the guaranteed exposure) and SA (for the guaranteeing party) approach. In the table below Table 3 the regulatory citations are laid out.

Table 3: regulatory citations

CRR 3 has profound impact on the IRB modelling landscape and credit risk calculation. Seemingly small changes in the CRR can lead to big changes in capital calculation. With years of experience in implementing and validating CRR and Basel 4 across the world, Finalyse can help you deliver and validate a CRR 3 compliant capital calculation.

[1] NHG, Voorwaarden en normen 2025-1, 2025.

[2] Nautadutilh, Eligibility of National Mortgage Guarantee as credit protection under the CRR.

[3] NHG, www.nhg.nl/over-nhg/stakeholders/.

[4] EBA, List of EU regional governments and local authorities treated as exposures to central governments (Article 115 CRR).

[5] EBA, Guidelines on credit risk mitigation for institutions.