PRA Consults on Eligibility of Guarantee as Unfunded Credit Protection
PRA published the consultation paper CP6/18, which sets out the proposed changes to the supervisory statement SS17/13 on credit risk mitigation. The consultation closes on May 16, 2018 and aims to clarify expectations about the eligibility of guarantees as unfunded credit protection under Part Three, Title II, Chapter 4 (credit risk mitigation) of the Capital Requirements Regulation or CRR (Regulation 575/2013). CP6/18 is relevant to all firms that come under the CRR.
CRR Part Three, Title II, Chapter 4 (Credit risk mitigation) sets out the criteria that a guarantee must meet to be eligible for credit risk mitigation. CRR allows firms to recognize some forms of credit risk mitigation in the calculation of their capital requirements. Credit risk mitigation can be funded or unfunded. One of the ways unfunded credit protection can be achieved is through a guarantee. That can be achieved through the obligation of a third party to pay out in the event of non-payment or default of a credit obligor. To be eligible as a guarantee for credit risk mitigation under the CRR, strict eligibility criteria must be met. PRA has identified that some firms are unclear on what contracts or other documented obligations are eligible to be treated as guarantees for credit risk mitigation under the CRR. Thus, PRA believes that additional clarity is needed to ensure that capital relief from guarantees is obtained only where the risk has been effectively transferred to the guarantor. The proposals extend to any contract or other documented obligation that purports to be a guarantee for achieving unfunded credit protection under credit risk mitigation of CRR. Part Three, Title II, Chapter 4 (Credit risk mitigation) of CRR sets out the criteria that a guarantee must meet to be eligible for credit risk mitigation. CP6/18 proposes amendments to SS17/13 to provide guidance on the eligibility criteria for the recognition of guarantees.
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Comment Due Date: May 16, 2018
Keywords: Europe, United Kingdom, Banking, Credit Risk, Credit Risk Mitigation, CRR, CP6/18, SS17/13, PRA
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