AI Summary of Article 500 Adjustment for massive disposals
This document outlines a temporary derogation allowing institutions to adjust their Loss Given Default (LGD) estimates when large disposals of defaulted exposures occur. Such adjustments are permissible under specific conditions, including prior notification to the competent authority and the timing of disposals between November 2016 and December 2024, provided that cumulative disposals exceed 20% of the defaulted exposures.
The competent authority must be informed promptly once the 20% threshold is reached. Furthermore, the European Commission is tasked with biennial assessments starting from December 2026 to evaluate asset quality and the efficacy of secondary markets for defaulted exposures, potentially leading to legislative proposals for extending or amending this derogation.
Article 500 Adjustment for massive disposals
1.By way of derogation from point (a) of Article 181(1), an institution may adjust its LGD estimates by partly or fully offsetting the effect of massive disposals of defaulted exposures on realised LGDs up to the difference between the average estimated LGDs for comparable exposures in default that have not been finally liquidated and the average realised LGDs including on the basis of the losses realised due to massive disposals, as soon as all the following conditions are met:
(a)the institution has notified the competent authority of a plan providing the scale, composition and the dates of the disposals of defaulted exposures;
(b) the dates of the disposals of defaulted exposures are after 23 November 2016 but not later than 31 December 2024;
(c) the cumulative amount of defaulted exposures disposed of since the date of the first disposal in accordance with the plan referred to in point (a) has surpassed 20 % of the outstanding amount of all defaulted exposures as of the date of the first disposal referred to in points (a) and (b).
The adjustment referred to in the first subparagraph may only be carried out until 31 December 2024 and its effects may last for as long as the corresponding exposures are included in the institution's own LGD estimates.