Legal base for the question:

In EBA/GL/2022/03 Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing under Directive 2013/36/EU, it is mentioned that:

189. To assess the level of concentration, competent authorities can use different measures and indicators, the most common being the Herfindahl-Hirschman Index (HHI) and Gini coefficients, which may then be included in more or less complex methodologies to estimate the additional credit risk impact.

In this case, in the calculation of an HHI index for determining, depending on the value of the index, an additional capital requirement for credit concentration risk, should be considered ONLY the top 100 or top 1000 exposures that have an RWA different from zero (for which a capital allocation is needed).

In EBA/GL/2022/03 Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing under Directive 2013/36/EU, it is mentioned that:

189. To assess the level of concentration, competent authorities can use different measures and indicators, the most common being the Herfindahl-Hirschman Index (HHI) and Gini coefficients, which may then be included in more or less complex methodologies to estimate the additional credit risk impact.

Regarding this mention, in the case of using the Herfindahl-Hirschman Index (HHI) to determine the concentration risk for a credit loan portfolio, in determining the HHI index are considered either the top 100 or the top 1000 gross value exposures, including among these, are also included those exposures fully guaranteed with cash collateral, in which case the net exposure is zero and consequently the RWA is also zero as it is also the capital allocation for these ones.

Our question refers to the opportunity to include or not in the calculation of the Herfindahl-Hirschman Index (HHI), those exposures fully guaranteed with cash collateral and for which the RWA is zero, also the capital allocation is zero.

Reasons for not including these exposures fully guaranteed with cash collateral and for which the RWA is zero, respectively the capital allocation is zero:

There are situations where within the credit portfolio there are exposures of high values, but fully guaranteed with cash collateral (zero RWA, zero capital allocation) which, if taken into account in determining the value of the HHI index, would result in the registration of a high value of this index and consequently the conclusion of the fact that the respective credit portfolio has a high risk of credit concentration risk and as a consequence would attract the establishment of an additional capital requirement for this credit (Pillar 2 capital requirements for credit concentration risk).

However, it would not justify the need to register an additional capital requirement for the concentration risk, much higher, for a credit portfolio in which there are high value gross exposures, but which are guaranteed with cash collateral (RWA zero, capital allocation zero), for the other exposures, except for those specified previously - exposures with RWA zero, capital allocation zero, only as a result of the fact that a high value of the HHI index is recorded.

In our opinion, in the calculation of the HHI index in order to determine the credit concentration risk of a credit portfolio and the application of an additional capital requirement depending on the value of the HHI index, only those exposures for which at an individual level a non-zero RWA is determined (a capital allocation is required) should participate in the determination of the HHI index and the exposures that have zero RWA (zero capital allocation) SHOULD NOT be included in the calculation of the HHI index.

The inclusion of these exposures with zero RWA, would determine the penalty, without any connection, for the other exposures for which a credit risk capital requirement is determined, by calculating an additional, much higher additional credit concentration risk capital allocation, precisely because of considering those gross value exposures (including those with zero RWA, zero capital allocation) in the calculation of the index.

In this case, in the calculation of an HHI index for determining, depending on the value of the index, an additional capital requirement for credit concentration risk, should be considered ONLY the top 100 or top 1000 exposures that have an RWA different from zero (for which a capital allocation is needed).