Response to discussion on the simplification and assessment of the credit risk framework
Q17. Do you agree with the approach proposed by EBA? Do you see further measures as necessary?
We welcome the EBA recognition of the need for a balanced risk sensitivity, especially its acknowledgement that “an increased risk sensitivity also ensures a more precise capital allocation, therefore bringing together risk management and regulatory metrics.” (paragraph 63, page 23 of the EBA Discussion Paper on Simplification and Assessment of the Credit Risk Framework, EBA/DP/2026/01).
To that end, and consistent with the mandate of article 506 (CRR3) to assess the observed riskiness of insured exposures with own funds requirements, we would propose that the EBA take the following measure: recognition of an LGD of 22.5% for exposures to insurance entities where the bank exposure is as policyholder of a policy of Credit Risk Insurance (CRI), not as direct lender. This regulatory adoption of an appropriately calibrated LGD for exposures to credit insurers where the Bank is a policyholder has received support among MEPs and is consistent with the findings of the 2024 ITFA Additional Report utilising European Banking Authority methodology (including all required margins of conservatism) on bank recovery data collected by Global Credit Data.
We firmly believe that the benefits in terms of material reduction of the miscalibration on this critical set of exposures outweigh any costs of potentially increased complexity and the transition process. Furthermore, the LGD is consistent with the current Basel Framework as this is a necessary clarification in a European context where the use of CRI by banks in this way is a regional specificity in comparison to other major markets. The LGD rationale is strengthened by the fact that risk is distributed to highly rated insurers and further mutualised to highly rated reinsurers, both of which are supervised under Solvency II (or equivalent regimes).
This is not a proposal to reduce capitalisation. It is a correction to a miscalibration introduced by CRR3, which applied a floor of 45% designed for senior unsecured exposures to a product with materially different risk characteristics. The proposed floor of 22.5% for CRI is in fact conservative relative to historical modelled values prior to CRR3’s introduction. Such a calibration is grounded in the empirical loss data set out in the ITFA Additional Report. Amending this aspect of the credit risk framework would constitute a simplification by bringing capital requirements into appropriate alignment with actual risk and ensure that CRI can continue to function effectively as a credit risk mitigation instrument supporting essential financing to the real economy.
Criticality of exposures
EBA recognition (paragraph 63, EBA/DP/2026/01) that “less risk sensitivity generally comes with higher conservatism. This can lead to an over-capitalisation, where the associated cost, such as hindering the financing of the real economy, may outweigh the potential benefits of enhanced financial stability” is evidenced by the 2025 IACPM ITFA Bank Survey of CRI usage (conducted jointly by the International Association of Portfolio Managers (IACPM) and the International Trade and Forfaiting Association (“ITFA”). This recent survey showed that, in the six months to June 2025 since the introduction of finalised Basel III across Europe, insured exposures of EU Banks saw a decline of over EUR 4 billion. This represents a EUR29 billion reduction in facilitated lending to the real economy. This contraction is due to the failure of rules to acknowledge and appropriately calibrate the LGD for the attributes of insurance products.
Materiality of miscalibration
Under current rules, a credit insurance policy used by a bank as UFCP under the Foundation Internal Ratings Based approach (F-IRB) is assigned the same 45% supervisory LGD for that usage as for an unsecured senior direct exposure to that insurer. These are fundamentally different instruments. Treating them the same is inappropriate: the resulting calibration does not reflect the actual risk profile of CRI, nor does it acknowledge the additional legal and regulatory protections that apply to policyholders. This miscalibration has directly harmed the functioning of a previously efficient and effective market.
The 2024 ITFA Additional Report[1]provides a comparison, as requested under article 506 (CCR3), of observed riskiness[2] of insured exposures with own funds requirements (capital). It shows that the required capital is twice as high as the observed riskiness. A relevant LGD to be used in the substitution approach for insured exposures would therefore be of 22,5%. This quantification includes all Margins of Conservatism and Downturn assessment as required by EBA. This is half of the current regulated level of prescribed LGD of 45%.
Simplicity of the Rules
Making necessary amendments to address this point contributes to the simplicity of the rules by : (1) clarifying the appropriate LGD for this usage (22.5%) as compared to the current over-calibration (45%); (2) applying the tools that the European Commission has given to itself to address this point explicitly under Article 506 of CRR3; (3) providing an appropriate resolution of the treatment of credit insurance as mandated by Article 506 of CRR3.
According to the same survey cited above (the 2025 IACPM ITFA Bank Survey of CRI usage), the ineffectiveness of prudential regulations in recognition of the risk mitigation effect of credit risk insurance is in the top 2 challenges faced by participating firms in using CRI.
Transition Costs
A straightforward substitution of the appropriately calibrated LGD figure into banks’ existing model would not result in material transition costs[AZ1] .
Intrinsic Consistency
This clarifying measure is consistent with the Basel framework: a better capital treatment for exposures to Insurers, as briefly outlined above, would not deviate from the Basel framework but simply specify a justifiable regulatory treatment overlooked at the time for credit risk mitigation. As this credit risk mitigant is primarily used by European banks, it warrants a specific treatment in Europe.
Extrinsic Consistency
Although this credit risk mitigant is primarily used by European banks, warranting a specific treatment in Europe, the UK Prudential Regulation Authority noted in Paragraph 4.7.4 of, “PS9/24 – Implementation of the Basel 3.1 standards near-final part 2”, that it reserves the right to revisit this issue should different approaches be adopted by other regulators[3]. This demonstrates that Europe taking the lead in this area would not be contrary to other regulatory approaches, particularly given the European specificity of the use of CRI as UFCP.
In conclusion, CRI is a predominantly European Credit Risk Mitigation Tool providing European banks with a key competitive tool in the global banking landscape. European Insurers and Reinsurers dominate in the global provision of CRI. For such multiline insurers, credit insurance will be just one product offered alongside numerous varied business lines that are not highly correlated, therefore ensuring portfolio diversification under Solvency II. The importance of credit risk insurance as a tool for European banks in managing their exposure should not be understated. Importantly, calibrating an appropriate LGD for the product in line with the 2024 ITFA Additional Report observing EBA methodology and all measures of conservatism would align with the EBA’s aim, where “an increased risk sensitivity ….ensures a more precise capital allocation, therefore bringing together risk management and regulatory metrics.” (paragraph 63, page 23 of the EBA Discussion Paper on Simplification and Assessment of the Credit Risk Framework, EBA/DP/2026/01).
[1] link - ITFA_Additional_Report_506-vf.pdf
[1]Based on Global Credit Data, regarding a data collection on insured portfolios of 9 banks.
[1] PS9/24 – Implementation of the Basel 3.1 standards near-final part 2 | Bank of England