CRR2 - SME Support factor
CRR2 treatment [Article 501]: Exposures (including exposures in default) to small-and-medium enterprises (SMEs) that are classified as retail, corporate or secured by mortgages on immovable property (excluding residential property) classes are eligible for a reduced risk weight based on the following:-
Exposures up to € 2.5 million – are reduced by a factor of 0.7619
Exposures over € 2.5 million – are reduced by a factor of 0.85
An entity is considered as eligible for SME support factor if its annual turnover does not exceed € 50 million (Article 2 – 2003/316/EC).
Example: The bank has provided an unsecured loan to an unrated corporate for € 4 million, and the corporates turnover is less than € 50 million.
The exposure up to €2.5 million a factor of 0.7619 is applied to arrive at the risk weight of € 1,904,750 (A)
For the remaining exposure of € 1.5 million a factor or 0.85 is applied to arrive at a risk weight of €1,275,000 (B)
The total risk weighted exposure is € 3,179,750 [i.e. (A) + (B) - an effective risk weight of 79.49%].
Implementation timeline: As per CRR2 this was planned to be implemented starting 28th June 2021. However, due to Covid-19, the EU implemented a ‘quick fix’ on 24 June 2020 (EU 2020/873) and brought the date of implementation forward to 27th June 2020.
Old CRR treatment [Article 501]: Exposures that are not in default to small-and-medium enterprises (SMEs) that are classified as retail, corporate or secured by mortgages on immovable property classes, and where total exposure to the counterparty/Group is less that € 1.5 million are eligible for a reduced risk weight SME factor of 0.7619 (i.e. if the risk weight was 100%, then the new adjusted risk weight after applying the SME support factor will be 76.19%).