What conditions should be met by a given agreement in order to qualify as an 'explicit guarantee arrangement'?
Shall the ‘explicit guarantee arrangements’ for the purpose of definition of public sector entities also be ‘guarantees’ eligible as unfunded credit protection or not?
Pursuant to Article 4(1)(8) of Regulation (EU) No 575/2013 (CRR), a public sector entity (PSE) means - i.a. - 'a non-commercial undertaking that is owned by or set up and sponsored by central governments, regional governments or local authorities, and that has explicit guarantee arrangements [...]'.
However, neither any examples of such arrangements, nor conditions required for classification of a particular agreement as an 'explicit guarantee arrangement' are provided.
The catalogue of agreements that remain ambiguous in the aforementioned context is especially numerous in case of non-commercial undertakings owned or set up and sponsored by regional governments or local authorities, with support agreements, endorsement agreements, execution contracts and other similar arrangements abound.
Since a typical guarantee issued by a third-party can be treated as eligible unfunded credit protection, were a local authority to fully and explicitly guarantee an exposure towards a non-commercial undertaking, the effective risk weight assigned to said exposure would be the one typical for 'Exposures to regional governments or local authorities'. We therefore assume, that ‘guarantees’ eligible as unfunded credit protection and the ‘explicit guarantee arrangements’ for the purpose of definition of public sector entities are not the same.
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