Regulatory Update: The Exercise of the Discretionary Right Under Article 495e CRR

The German Federal Financial Supervisory Authority (BaFin) has recently issued a draft circular (xx/2025 BA) concerning the exercise of the discretionary right under Article 495e of the Capital Requirements Regulation (CRR). This document provides guidelines for certain financial institutions on the continued use of External Credit Assessment Institution (ECAI) ratings that assume implicit government support for risk positions towards institutions. The circular follows recent amendments to the CRR, introduced by Regulation (EU) 2024/1623, effective as of January 1, 2025.

Scope and Applicability

The circular applies to the following institutions:

• Institutions subject to Article 6(1) or Article 11(1) of CRR.
• Less significant institutions (LSIs) as defined under Article 6(4) of Regulation (EU) No 1024/2013 (SSM Regulation).
• Institutions treated as CRR credit institutions under Section 1a of the German Banking Act (KWG), provided they are not exempt from Part 3 of CRR.
• The Kreditanstalt für Wiederaufbau (KfW) under Section 3 No. 2 of the KfW Act.

Implications for Financial Institutions

The circular presents both opportunities and challenges for affected institutions. On the one hand, the continued use of ECAI ratings with implicit government support assumptions may provide capital relief and enhance market stability. On the other hand, institutions must navigate the risk of potential supervisory interventions and the possibility of shifting regulatory expectations in the future.

Potential Risks and Considerations

• Market Distortion: Allowing implicit government support to influence credit ratings could distort risk assessments and capital requirements.
• Reliance on External Ratings: This policy continues the dependency on ECAI assessments rather than encouraging institutions to develop internal risk assessment methodologies.
• Regulatory Uncertainty: While the circular provides clarity until 2029, future regulatory changes could alter the risk landscape for institutions relying on these provisions.

Conclusion

BaFin’s exercise of discretion under Article 495e CRR represents a significant regulatory decision impacting financial institutions in Germany. While it offers temporary relief and stability, it also underscores the need for careful risk management and regulatory compliance. Institutions must ensure adherence to the notification requirements and remain prepared for potential supervisory interventions.

As financial markets evolve, the discussion around implicit government support in credit ratings will likely continue. Institutions should proactively monitor regulatory developments and assess their long-term risk management strategies accordingly.