How are sovereign and public-sector exposures risk-weighted, and what are the large exposure limits?

These tables come from the CRR's standardised approach to credit risk. Today they matter for banks and Class 1-minus CIFs; since 26 June 2021 Class 2 and Class 3 CIFs have used the IFR instead: the highest of fixed overheads, permanent minimum capital and, for Class 2 only, K-factors. The exam material also says CySEC may adjust a requirement based on fixed overheads when a firm's business changes materially; IFR Article 13(2) keeps that power.

A rating from an external credit assessment institution maps to a credit quality step. Central governments and central banks at steps 1 to 6 carry 0%, 20%, 50%, 100%, 100% and 150%, and unrated ones carry 100%. Exposures to the ECB, and to EU governments and central banks in their own currency, carry 0%. The European Commission decides whether a third country's supervisory and regulatory rules are at least equivalent to the EU's. Where an equivalent third country gives its own government or central bank a lower weight for exposures in its domestic currency, EU firms may use the same weight.

Public sector entities without their own rating have their own table, keyed to the step of the central government where they are based: 20%, 50%, 100%, 100%, 100% and 150%. A rated public sector entity is weighted by its own rating instead. Where the government is unrated they carry 100%, and exposures with an original maturity of three months or less carry 20%. Where an equivalent third country weights its own public sector entities using this table, EU firms may do the same; otherwise they apply 100%. Exceptionally, a public sector entity may be treated as its government, regional government or local authority where a guarantee from that body removes any difference in risk. In both tables, only step 6 reaches 150%.

The exam material caps a firm's exposure to any one client or connected group at 25% of eligible capital, measured after credit risk mitigation. Since 28 June 2021 the CRR has measured the limit against Tier 1 capital instead; the mechanics are otherwise unchanged. Where the client is an institution or an investment firm, or a connected group includes one, the limit is the higher of 25% and €150 million, as long as exposures to the group's other members stay within 25%. Where €150 million would exceed 25% of the firm's capital, the firm sets a reasonable limit in its policies to control concentration risk, never above 100%.

Member States may exempt listed exposures until a legal act following the Commission's review enters into force, and not after 31 December 2028. CySEC's list, now in Directive DI97-01 for Class 1-minus CIFs, fully exempts covered bonds; claims on EU regional governments and local authorities weighted at 20%; intra-group exposures within the same consolidated supervision; next-day claims on investment firms that are not in a major trading currency and do not count as own funds; half of certain low-risk documentary credits and undrawn credit facilities (off-balance-sheet items) and, with CySEC's agreement, 80% of certain mutual guarantee scheme guarantees; legally required guarantees on mortgage loans funded by mortgage bonds; and claims on recognised exchanges. The list is limited to low-risk, intra-group and market-infrastructure items.

Since 26 June 2021 Class 2 CIFs have applied the IFR's concentration rules, which cover trading-book exposures only. The limit is 25% of own funds per client or connected group, or the higher of 25% and €150 million where the counterparty is a credit institution or investment firm, capped at 100% of own funds. A firm that exceeds the limit must notify CySEC and hold extra own funds for the excess (the K-CON factor). While an excess lasts 10 days or less, the exposure may not exceed 500% of own funds, and excesses lasting longer may not add up to more than 600%. Some exposures are excluded outright, such as those to central counterparties and to governments weighted at 0%, and CySEC may exempt others, such as covered bonds and intra-group exposures. These IFR exclusions and exemptions have no 2028 end date.