1.1 Although we understand from discussions at the public hearing on 15th April that clarification on this point may be forthcoming through the Quantitative Impact Assessment process, and we will engage with the European Commission (EC) on this point as well, we would respectfully request that the EBA support amending Article 215 of the CRR (additional requirements for guarantees) to reflect the explicit permission granted in Article 190(a) of the Bank Committee on Banking Supervision’s International Convergence of Capital Measurement and Capital Standards; a Revised Framework for the guarantor to “step into the shoes” of the underlying obligor:
1.2 Article 190(a) permits the guarantor to either make one lump sum payment or “assume the future payment obligations of the counterparty covered by the guarantee” so a single payment is not required by the BCBS in order for a guarantee to meet operational requirements.
1.3 The “new requirement to treat guaranteed exposures under the same approach that the institution applies for direct exposures to the guarantor” should not be applied for exposures of the bank as policyholder to insurance companies, as it is not equivalent exposure, given the priority claim on insurance companies that banks hold as policyholders. The banks should be allowed to recognise (depending on the jurisdiction and its respective insurance regulations) the improved LGD of its exposure as policyholder, based on the risk differentiators set forth in this paper.
1.4 Paragraph 29a.ii of the Draft Guidelines in the consultation document (p.35; see also paragraph 33 which references “comparable exposure”) states that banks using the substitution approach should substitute both the PD and LGD risk parameters of the underlying exposure with the corresponding PD and LGD of a comparable direct exposure [emphasis added] to the guarantor. However, this does not correctly reflect the exposure of the bank to the protection provider as a policyholder of an insurance policy. The exposure is not comparable to the bank’s exposure as a creditor, as policyholders are in a privileged position compared to unsecured creditors (see Annex B to the LMA response). We also recommend that the EBA reviews the Fitch Report (attached with LMA response).
1.5 As discussed at the public hearing on 15th April, we appreciate that the CRR as currently drafted does not explicitly address credit insurance as CRM and therefore we intend to participate in any public consultation and otherwise will engage with the EU Commission on amendments to the CRR on this point. However, we would ask that the European Banking Authority, in responding to the Call for Advice of May 2018, consider clarifying the recognition of non-payment insurance and its unique characteristics. Paragraph 15 of the Draft Guidelines suggests that “credit insurance [can] effectively [function] like a guarantee or like a credit derivative [emphasis added]. It therefore is logical to provide explicit recognition of credit insurance, which has characteristics of both of the current UCP tools, but also unique advantages (see Annex C of the LMA response).
1.6 The insurance industry would be prepared to work with EBA and European Insurance and Occupational Pensions Authority (EIOPA) and other relevant stakeholders and regulators on this, including on appropriate definitions and guidelines to provide clarity on non-payment insurance as an independent CRM tool.
See Annex A for additional supporting points.
2.1 We feel that the GL are unclear on this point and warrant clarification. In addition, it is important to note that neither of the two options presented are consistent with/both the options presented conflict with the normal contractual arrangements with regard to the allocation of cashflows from the obligor between insurers and banks using credit insurance for UCP.
2.2 Due to strength of insured policyholders’ claims compared to unsecured creditors, we advocate that the EBA guidance should explicitly permit banks to recognise their priority claim as policyholder in their LGD calculations.
2.3 Paragraph 29a.ii of the Draft Guidelines (p.35; see also paragraph 33 which references “comparable exposure”) states that banks using the substitution approach should substitute both the PD and LGD risk parameters of the underlying exposure with the corresponding PD and LGD of a comparable direct exposure [emphasis added] to the guarantor. However, this should not apply where the exposure of the bank to the protection provider is as policyholder of an insurance policy, as the exposure is not comparable, as policyholders are in a privileged position compared to unsecured creditors, in the same way that depositors have preference over unsecured creditors in a bank structure. Therefore, we request that a lower LGD should be considered where the bank’s exposure is as a policyholder.
2.4 This is also a concern that should be addressed by the EBA in responding to the Call for Advice of May 2018 (Section 2.4.5), regarding the “new requirement to treat guaranteed exposures under the same approach that the institution applies for direct exposures to the guarantor”.
2.5 Paragraph 35c. of the Draft Guidelines states that “the degree to which the guarantor’s ability to fulfil the contractual obligation under the unfunded credit protection agreement is correlated with the obligor’s ability to repay can only result in a conservative adjustment of the grades, pools or LGD estimates.”. In our view this Guideline should be modified to address situations where the credit protection is provided by non-payment insurance, given insurers are regulated entities whose multi-line liabilities are diverse and whose capital is ring-fenced by regulation in order to meet their obligations to policyholders. The likelihood of correlation with the risk of default by obligors covered under non-payment insurance is therefore very low.