EBA publishes final guidelines on ADC exposures to residential property

Abstract

On June 27, 2025, the European Banking Authority (EBA) published the final guidelines on ADC exposures to residential property (EBA/GL/2025/03) on the application of a reduced risk weight to ADC exposures. In this article,

• we classify the topic of risk weighting of ADC exposures from a regulatory perspective,
• highlight the conceptual changes associated with the CRR III amendment in relation to the exposure classes and
• provide an initial overview of the regulatory content of the corresponding EBA guidelines.

An in-depth discussion of the EBA-GL and the derivation of specific recommendations for action is planned for one of the following issues of our customer magazine NEWS following the expected BaFin Comply statement (more on this below).

Initial situation

On June 27, 2025, the EBA published its Guidelines on ADC exposures to residential property under CRR 3 | European Banking Authority (EBA/GL/2025/03). They relate to the so-called standardized approach to credit risk, i.e. the standardized capital backing of risk positions via so-called risk position classes with specific risk weightings in each case.

These guidelines thus specify the conditions set out in Art. 126a (2) CRR III, under which ADC exposures to residential real estate can be assigned a reduced risk weight of 100 % instead of 150 %.

Context

Under the CRR II regime, i.e. prior to the EU banking package 2024, “exposures from land acquisition, development and construction” (e.g. property developer financing, financing of condominium subdivisions) did not constitute a separate exposure class.

As a rule, these were classified as “speculative real estate financing” in accordance with Art. 4 (1) No. 79 CRR II (= old version). They were therefore subject to a risk weight of 150% as so-called “high-risk exposures” in accordance with Art. 128 (2) c).

In the context of CRR III, the exposure class “particularly high-risk exposure” – which is subject to interpretation – was dissolved in favor of dedicated, in some cases new exposure classes.

For ADC items, this meant a separate exposure class Art. 126a “Exposures from land acquisition, development and construction” with an initial risk weight of 150%. However, in line with the Basel III standards, Art. 126a (2) CRR III provides for the possibility of applying a reduced risk weight of 100%, provided that certain risk-mitigating conditions are met, namely:

• either: “legally binding pre-sale or pre-lease contracts for which the purchaser or tenant has made a substantial cash deposit (….)”,
• or: “the obligor has substantial equity at risk, which is represented as an appropriate amount of obligor-contributed equity to the residential property value upon completion. (…)”.

At the same time, the EBA received the mandate via Art. 126a (3) CRR

1. to define these undefined terms via a guideline and
2. to take into account the social purposes of lending via specific regulations for public housing.

The EBA has now fulfilled this mandate via EBA/GL/2025/03.

Subject of regulation EBA/GL/2025/03

As explained, the guidelines now set out the specific conditions under which institutions can apply a risk weight of 100% instead of 150% to ADC risks. In addition to the conditions of “sound standards for lending and credit monitoring”, these are now specifically:

either

or

Assessment

In its guideline, the EBA itself refers to a Quantitative Impact Study (QIS) from December 2023, according to which around 32 % of the participating banks’ ADC exposures meet the requirements for the privileged risk weight of 100 %. This would lead to a 10.6 % reduction in risk-weighted assets in this exposure class.

However, the potential savings in own funds are offset by the costs of creating the procedural requirements. In this respect, it is already advisable to consider the business and risk policy implications.

Incidentally, IRBA institutions also benefit from the application of a reduced risk weight via the so-called output floor (Art. 465 CRR III).

Implementation

EBA/GL/2025/03 has not yet been translated into the official EU languages. Two months after this has taken place, BaFin, as the national supervisory authority, is to declare itself as part of the so-called comply-or-explain procedure with regard to the type and scope of application of the EBA guideline for German supervisory practice. At this point in time, the regulations should also be applied to supervisory practice.

Shortly after BaFin’s expected comply-or-explain statement, we will discuss the application requirements and business policy implications in more detail in a separate follow-up article in our customer magazine NEWS.