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 Updates List of Validation Rules for Reporting by Banks

    EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.

    September 10, 2020 WebPage Regulatory News
    News

    EBA Responds to EC Call for Advice to Strengthen AML/CFT Framework

    EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).

    September 10, 2020 WebPage Regulatory News
    News

    NGFS Advocates Environmental Risk Analysis for Financial Sector

    NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.

    September 10, 2020 WebPage Regulatory News
    News

    MAS Issues Guidelines to Promote Senior Management Accountability

    MAS published the guidelines on individual accountability and conduct at financial institutions.

    September 10, 2020 WebPage Regulatory News
    News

    APRA Formalizes Capital Treatment and Reporting of COVID-19 Loans

    APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.

    September 09, 2020 WebPage Regulatory News
    News

    SRB Chair Discusses Path to Harmonized Liquidation Regime for Banks

    SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.

    September 09, 2020 WebPage Regulatory News
    News

    FSB Workshop Discusses Preliminary Findings of Too-Big-To-Fail Reforms

    FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.

    September 09, 2020 WebPage Regulatory News
    News

    ECB Updates List of Supervised Entities in EU in September 2020

    ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.

    September 08, 2020 WebPage Regulatory News
    News

    OSFI Identifies Focus Areas to Strengthen Third-Party Risk Management

    OSFI published the key findings of a study on third-party risk management.

    September 08, 2020 WebPage Regulatory News
    News

    FSB Extends Implementation Timeline for Framework on SFTs

    FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.

    September 07, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5796