The Issue of Implied State Support and the New BaFin Circular 06/2025 (BA) on the Exercise of the Option under Article 495e CRR

The topic of implied state support in financial regulations has been a matter of discussion for years, particularly in relation to credit assessments and risk-weighted assets under the Capital Requirements Regulation (CRR). The Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) has recently issued Circular 06/2025 (BA), which provides clarity on the exercise of the option under Article 495e CRR, allowing institutions to continue using external credit assessments (ECAI ratings) that assume implied state support.

Background and Regulatory Context

As of January 1, 2025, the amended Regulation (EU) No. 575/2013, incorporating changes from Regulation (EU) 2024/1623, has been in force. The newly introduced Article 495e CRR enables competent authorities to permit institutions to use ECAI ratings that incorporate implied state support for risk positions towards other institutions, deviating from Article 138(1)(g) CRR until December 31, 2029.

BaFin’s Circular 06/2025 (BA) applies to institutions falling under Article 6(1) or Article 11(1) of the CRR and classified as “less significant institutions” (LSIs) under Article 6(4) of the SSM Regulation (EU) No. 1024/2013. Additionally, it extends to institutions treated as CRR credit institutions under Section 1a of the German Banking Act (KWG), provided they are not exempt from Part 3 of the CRR. Furthermore, it applies to the Kreditanstalt für Wiederaufbau (KfW) under Section 3 No. 2 KfWV.

Implications of Implied State Support

Implied state support refers to the assumption that a financial institution may receive governmental backing in times of financial distress, thereby affecting its creditworthiness. This assumption has significant implications for regulatory capital requirements, as it may lead to lower risk weights and more favorable credit ratings for institutions benefiting from such perceived support.

The issue arises when credit ratings assigned by ECAIs reflect this implicit support rather than the standalone financial strength of an institution. The regulatory concern is that reliance on such ratings may create distortions in risk assessment, underestimating the actual risk exposure and potentially leading to financial instability. In response, CRR provisions have sought to limit the use of such ratings to ensure a more accurate risk assessment framework.

BaFin’s Approach

This approach balances the need for regulatory flexibility with prudential oversight. By allowing the continued use of such ratings, BaFin acknowledges the role of governmental backing in the stability of certain institutions. At the same time, its ability to impose restrictions ensures that institutions do not excessively rely on artificially enhanced credit assessments.

Conclusion

The debate on implied state support remains a critical aspect of financial regulation, influencing risk assessment, capital adequacy, and financial stability. BaFin’s Circular 06/2025 (BA) reflects a pragmatic approach by leveraging regulatory discretion while maintaining supervisory safeguards. Institutions must remain vigilant in their risk assessment methodologies, ensuring that their reliance on ECAI ratings aligns with both regulatory expectations and sound risk management principles.