Is the requirement in Article 213(1)(b) CRR met in case of a credit insurance whose contractual terms provide that the institution shall bear a first loss, which is calculated at aggregate level with regard to several different exposures?
According to Article 213(1)(b) CRR credit protection deriving from a guarantee or credit derivative only qualifies as eligible unfunded credit protection when, inter alia, the extent of the credit protection is clearly defined and incontrovertible.
Most credit insurances contains an aggregated first loss (AFL) clause, according to which part of the loss has to be borne by the insured credit institution. This would be no problem if the AFL referred only to one exposure. This might be different, however, if the AFL referred to a portfolio of several exposures, in which case it is not clear on which part of the exposures the AFL will be applied.
For example: given five exposures of EUR 5 million each and an AFL equal EUR 500k, it the insurance will cover 98% of each exposure of EUR 5 on an average basis or 98% of the aggregated exposure of EUR 25 million.
With regard to a single exposure of EUR 5 million, it is not clear whether the cover by the credit insurance would meet the requirement in Article 213(1)(b) CRR as in case the AFL amount of EUR 500k is entirely borne by one exposure, so that the insurance covers only 90% of it (considering the AFL might be borne by one of each of the exposures) but in case two exposures default at the same time the AFL will be split between the two so that the coverage would be 95%, in case three exposures default at the same about 96.7% and so on.
The cover percentage of each exposure would vary even more in case the owed amounts were different for each exposure.
In such a case it is unclear whether the credit insurance would meet the requirement in Article 213(1)(b) CRR at all as the extent of the credit protection would not be foreseeable with regard to the single exposure but only at an aggregate level.
According to Article 213(1)(b) Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2), for a guarantee or credit derivative to be eligible for the purposes of CRM applicable to institutions using the Standardised approach (SA) and institutions using the Internal Rating Based (IRB) approach, which have not received permission to use own LGDs and conversion factors for the calculation of risk-weighted exposure amounts , the extent of the credit protection has to be clearly defined and incontrovertible.
Regarding the example provided by the submitter, such eligibility requirement would be met if the guaranteed amount was clearly identifiable, even if calculated at the level of a pool of exposures, and not necessarily for each exposure.
Additionally, as in the example provided, the securitisation framework (Chapter 5, Title II, Part 3 of the CRR) applies when an institution – through a securitisation - transfers a part of the risk of the pool in tranches – as defined in Article 4(1)(67) CRR and Article 2(6) of Regulation (EU) No. 2019/2402 (Securitisation Regulation) - and the conditions of the guarantee contract result in risk tranching e.g. when the guarantee covers indistinctly any amount above the first loss amount stemming from the covered pool.