EBA Opinion on Treatment of Credit Insurance in Prudential Framework
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
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
Victoria Saporta of BoE Outlines Ideal Post-EU Regulatory FrameworkRelated Articles
EBA Updates Filing Rules for Supervisory Reporting
The European Banking Authority (EBA) published version 5.1 of the filing rules for supervisory reporting.
ECB Amends Guideline on Procedures for Collection of AnaCredit Data
The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.
ECB Amends Guideline on Procedures for Collection of AnaCredit Data
The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.
EBA Publishes Standards on Disclosure of Investment Policy Under IFR
The European Banking Authority (EBA) published the final draft regulatory technical standards on disclosure of investment policy by investment firms, under the Investment Firms Regulation (IFR).
APRA Finalizes Guidance for New Prudential Standard on Remuneration
The Australian Prudential Regulation Authority (APRA) published the prudential practice guide CPG 511 to assist banks, insurers, and superannuation licensees in meeting requirements of CPS 511, the new prudential standard on remuneration.
OCC Updated LIBOR Self-Assessment Tool for Banks
The Office of the Comptroller of the Currency (OCC) published a bulletin that provides an updated self-assessment tool for banks to evaluate their preparedness for cessation of the London Interbank Offered Rate (LIBOR).
TCFD Updates Guidance for Financial Disclosures on Climate Risk
The Financial Stability Board (FSB) published a report that examines the progress made toward disclosures aligned with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
BCBS Report Examines Progress on Adoption of Basel III Framework
The Basel Committee on Banking Supervision (BCBS) published the progress report on adoption of the Basel III regulatory framework in member jurisdictions.
ACPR Implements Updates Related to DPM Version 3.1
The French Prudential Supervisory Authority (ACPR) has implemented, in its information system, updates linked to the Data Point Model (DPM) version 3.1.
EBA Note Examines Transition Risks of Benchmark Rates
The European Banking Authority (EBA) published a thematic note that aims to identify and raise awareness of the transition risks of benchmark rates, as the London Interbank Offered Rate (LIBOR) and the Euro Overnight Index Average (EONIA) are close to being phased out.
