Expensive, annoying, incomprehensible? ADC/IPRE/Non-IPRE – Classification according to CRR III

Flashlight

CRR III increases pressure on capital buffers

Several credit institutions, particularly regional banks with a high proportion of real estate financing, have recently reported that the new credit risk standardised approach (KSA) under CRR III has lowered capital ratios¹. One driver has been identified: the new regulatory requirements (ADC/IPRE classification) for precisely these types of real estate financing (ADC/IPRE).

This raises the question: does it have to be this way? We believe that it does not necessarily have to be.

When does CRR III apply to ADC/IPRE real estate financing?

The answer is provided by CRR III itself: it significantly tightens the requirements for real estate financing and focuses on the issue of classification. Whether an exposure is classified as ADC (Acquisition, Development, Construction) or IPRE (Income Producing Real Estate) directly determines the applicable risk weight (RWA) – and thus the required amount of capital backing.

But why is this so relevant? CRR III stipulates that ADC and IPRE should start with high base risk weights. These may only be reduced if all criteria, some of which are narrowly defined, are met.

This makes the classification itself a decisive factor: even minor ambiguities – for example, in the distinction between IPRE and non-IPRE – lead to higher RWAs and thus to a noticeable strain on the capital buffer.

The specific requirements that CRR III places on ADCs, IPREs and non-IPREs are outlined in the articles by Danner & Ndoj (2025) (Article in German), Helbig (2025) and Puckhaber (2024) (Article in German).

More precise classification and pricing create scope

Although the higher risk weightings associated with ADC/IPRE-classified real estate financing have a direct impact on the equity ratio, many institutions are not yet making consistent use of the available control options.

More precise classification, correct determination of risk weighting (IPRE does not always mean IPRE) and pricing tailored to this can significantly mitigate the negative effects.

This is precisely where the scope for business management comes in, which CRR III narrows but by no means completely closes. Simply scaling back new business – as some institutions are considering, according to Kohlhaus et al. (2026) – is an expensive and unsustainable response.

It is more effective to make consistent use of the available levers to actively manage capital buffers and profitability.

Four specific control measures: How institutions can actively protect their capital buffers

1. Precise classification. Clearly distinguishing between ADC/IPRE/non-IPRE credit exposures prevents misclassifications and unnecessary RWAs. This reduces rework in back office and reporting and creates a robust basis for capital management and pricing.
2. High-quality documentation. Clearly justifying and comprehensively documenting LTV (loan-to-value), DSCR (debt service coverage ratio), cash flows and collateral creates audit certainty and enables the use of reduction criteria. This reduces queries and makes risk weights more reliable and controllable.
3. Adjusted pricing. Those who transparently integrate capital costs – i.e. RWA-based costs – into their terms and conditions can identify early on what margins are required and how different scenarios (IPRE vs. non-IPRE) differ economically. Pricing thus becomes an active instrument for capital and risk buffer management.
4. Active management. By specifically designing key parameters such as loan-to-value ratios, covenants, repayment structures and collateral, risk weights can be reduced and unnecessary capital commitment avoided. Small adjustments thus have a noticeable effect on RWA, equity ratio and overall bank management.

Conclusion and invitation to open dialogue

Although CRR III sets strict regulatory parameters, there are clear and effective options for structuring within these limits.

Institutions that consistently integrate classification, documentation, parameter control and pricing do not need to scale back their new business. Instead, they can actively manage their risk weights, stabilise capital buffers and secure their profitability at the same time – through structure, clarity and conscious decisions.

This is precisely why an open exchange is worthwhile: How are institutions already using this leeway today? What are the challenges in distinguishing between IPRE and non-IPRE? What impact does classification have on consulting, reporting and pricing – and which solutions have proven themselves? We are convinced that now is the right time to share experiences and not only comply with CRR III, but also actively use it for better control.