Question ID:
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Credit risk
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Disclose name of institution / entity:
Type of submitter:
Competent authority
Subject Matter:
Application of Article 215(2)(b) of the CRR
Can the competent authorities be satisfied that the effects of a guarantee (which covers losses resulting from the non-payment of interest and other types of payments which the borrower is obliged to make) justify the treatment of eligible unfunded credit protection when the time of payment such guarantee is indeterminate?
Are there other considerations that the competent authorities should take into account to be satisfied with the effects of the guarantee to justify such treatment, in addition to those listed in article 213 and 215(1)(b) and (c) of CRR?
Background on the question:
Deficiency guarantees allow the guarantor to postpone any payment as long as the ultimate loss for the creditor has not been determined. Therefore, timeliness of payment of claims from the guarantor is, in principle, not assured if no time limit to the effective payment is included in the guarantee agreement.
According to Q&A 2014_803, "Under Article 215 of Regulation (EU) No. 575/2013 (CRR), a guarantee may only qualify as eligible unfunded credit protection where all of the conditions set out in that article and all of the conditions in Article 213 are met. If, by the terms of the guarantee, the lending institution does not have the right to pursue the guarantor for any monies due but unpaid until such time as losses from the guaranteed exposures have been realised (the timing of which is indeterminate), neither the conditions of Article 215(1)(a) nor Article 213(1)(c) of the CRR, particularly point (iii), would be met."
It is not clear though if this conclusion is also valid when, in line with article 215 (2)(b), the protection provider is an entity listed in Article 214(2) of CRR, the agreement fulfils the criteria to also cover losses resulting from the non-payment of interest and other types of payments which the borrower is obliged to make, and such deficiency guarantees don not include a contractual time limit to the effective payment.
Date of submission:
Published as Final Q&A:
Final Answer:
Article 215(2) of the CRR stipulates that for guarantees in the context of mutual guarantee schemes or provided by or counter-guaranteed by entities listed in Article 214(2) CRR, the requirement under Article 215(1)(a) CRR shall be considered fulfilled if either of the conditions under Article 215 (2)(a) or (b) CRR are met. In turn, all other criteria for a guarantee to be eligible for credit risk mitigation have to be fulfilled also by guarantees that benefit from the aforementioned derogation of Article 215(1)(a) CRR. This is also in line with Q&A 2014_803.
Against this backdrop, Article 213(1)(c) CRR requires, in point (iii) that the "credit protection contract does not contain any clause, the fulfilment of which is outside the direct control of the lender, that [...] (iii) could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original obligor fails to make any payments due".
Accordingly, while the expression "timely manner" allows some flexibility, it would not allow any "determinable" period, whose length depends on circumstances on which the institution has no influence. Therefore, the point in time at which payment under the guarantee can be expected should in a first step be clearly determinable for the institution and the guarantor must not have the ability to postpone the payment in an indeterminable manner.
Article 215 (2)(b) CRR, where applicable, requires institutions to demonstrate to the satisfaction of the competent authority that the "effects of the guarantee, which shall also cover losses resulting from the non-payment of interest and other types of payments which the borrower is obliged to make, justify such treatment ". As all other eligibility criteria under CRR also have to be met in order to recognise the effects of the guarantee, this demonstration should also include sufficient proof of the fulfilment of all other eligibility criteria under CRR.
Furthermore, where an institution makes use of guarantees that fall under the scope of Article 215 (2) CRR, this should be reflected in risk management processes in accordance with Article 80 of CRD IV.
Final Q&A
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:

Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.