Featured Product

    EBA Opinion on Treatment of Credit Insurance in Prudential Framework

    March 10, 2020

    EBA published an opinion on the treatment of credit insurance in the prudential framework. This opinion is in response to the extensive feedback received by EBA during the public consultations on draft guidelines on credit risk mitigation for institutions applying the internal ratings-based (IRB) approach with own estimates of Loss Given Default (LGD). In its opinion, EBA concludes that no specific regulatory LGD should be set for credit insurance claims and calls for implementation of the final Basel III framework as agreed by BCBS. EBA submitted this opinion to EC to inform the current work on the proposal for revisions of the Capital Requirements Regulation (CRR) in relation to the implementation of the final Basel III framework.

    The main concerns raised in the feedback received relate to the LGD applied to exposures to the insurance companies under the IRB approach without the use of own estimates of LGD, especially in the context of the changes introduced in the final Basel III framework published by the BCBS in December 2017. These reforms disallow the use of own estimates of LGD for exposures to financial institutions, including insurance companies. As a result, the regulatory values of LGD have to be also used where the effects of credit insurance used as credit risk mitigation is recognized through substitution of risk parameters. This was commented as overly punitive, given the higher seniority of claims from policy insurance over other claims toward insurance undertakings.

    The analysis presented in the opinion leads to the conclusion that there should not be a specific value of regulatory LGD for credit insurance claims. While higher seniority typically applies to claims from insurance policies due to the specific structure of the balance sheets of the insurance undertakings, most of the claims in the unwinding proceedings would benefit from such priority. Thus, in case of failure of an insurance company, the insurance policy holders may still suffer from significant losses, especially in the conditions of economic downturn. There is no evidence that these losses would be significantly lower than the currently applicable regulatory LGD values. The opinion also points out that the final Basel III framework has been calibrated at the overall level and as such should be implemented in EU in line with the international agreement. EBA also stressed that specifying any preferential treatment for the claims on credit insurance policies would not be compliant with the final Basel III framework. 

     

    Related Links

    Keywords: Europe, EU, Banking, Insurance, Credit Risk, IRB Approach, CRR, LGD, Basel III, Opinion, BCBS, EBA

    Featured Experts
    Related Articles
    News

    EBA Publishes Phase 2 of Technical Package on Reporting Framework 2.10

    EBA published phase 2 of the technical package on the reporting framework 2.10, providing the technical tools and specifications for implementation of EBA reporting requirements.

    July 10, 2020 WebPage Regulatory News
    News

    FASB Proposes to Delay Implementation of Insurance Contracts Standard

    FASB issued a proposed Accounting Standards Update that would grant insurance companies, adversely affected by the COVID-19 pandemic, an additional year to implement the Accounting Standards Update No. 2018-12 on targeted improvements to accounting for long-duration insurance contracts, or LDTI (Topic 944).

    July 09, 2020 WebPage Regulatory News
    News

    APRA Updates Regulatory Approach to Loan Deferrals Amid COVID Crisis

    APRA updated the regulatory approach for loans subject to repayment deferrals amid the COVID-19 crisis.

    July 09, 2020 WebPage Regulatory News
    News

    BCBS and FSB Set Out Recommendations for Benchmark Transition

    BCBS and FSB published a report on supervisory issues associated with benchmark transition.

    July 09, 2020 WebPage Regulatory News
    News

    IAIS Sets Out Recommendations for Benchmark Transition for Insurers

    IAIS published a report on supervisory issues associated with benchmark transition from an insurance perspective.

    July 09, 2020 WebPage Regulatory News
    News

    ESMA Updates Reporting Manual on European Single Electronic Format

    ESMA updated the reporting manual on the European Single Electronic Format (ESEF).

    July 09, 2020 WebPage Regulatory News
    News

    EBA Calls on Resolution Authorities to Consider Impact of COVID Crisis

    EBA published a statement on resolution planning in light of the COVID-19 pandemic.

    July 09, 2020 WebPage Regulatory News
    News

    BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework

    BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework

    July 08, 2020 WebPage Regulatory News
    News

    ECB Guideline on Materiality Threshold for Credit Obligations Past Due

    ECB published a guideline (2020/97), in the Official Journal of European Union, on the definition of materiality threshold for credit obligations past due for less significant institutions.

    July 08, 2020 WebPage Regulatory News
    News

    FED Temporarily Revises FR Y-14 With Respect to PPP and CARES Act

    FED temporarily revised the capital assessments and stress testing reports (FR Y-14A/Q/M) to implement the changes in response to the COVID-19 pandemic.

    July 08, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5458