Question ID
2019_4765
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
4, 113, 128
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
Not applicable
Type of submitter
Individual
Subject matter
Recognition of “unfunded credit risk protection” as CRM, in case of “items associated with particular high risk”
Question

Can “unfunded credit risk protection” reduce the credit risk exposures in case of “items associated with particular high risk”?

Background on the question

Q&A 215 clarifies that “exposure types listed in Article 128 (2) and (3) are considered as having particular high risk and transferring these into other exposure classes with lower risk weights would undermine applying appropriate risk weights to cover unexpected losses related to these high risk items.”

According to such Q&A it seems that “unfunded credit risk protection” cannot be considered as CRM in case of “items associated with particular high risk”.

This limitation is very burdensome in cases where the protection provider is an ECA and where the ultimate guarantor is a Sovereign.

Submission date
Final publishing date
Final answer

According to Article 4(1)(59) of Regulation (EU) No 575/2013 (CRR) ‘unfunded credit protection' means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of an institution derives from the obligation of a third party to pay an amount in the event of the default of the borrower or the occurrence of other specified credit events.

For exposures to which an institution applies the Standardised Approach under Chapter 2, Part Three, Title 2 of the CRR, Article 108(1) CRR allows the use of credit risk mitigation in accordance with Chapter 4 of Part Three, Title 2 of the CRR in the calculation of risk-weighted exposure amounts. In addition, Article 113(3) CRR clarifies that the risk weight applicable to an exposure item subject to credit protection may be amended in accordance with Chapter 4.

It follows that, for an exposure treated under the Standardised Approach and assigned to the “exposures associated with particularly high risk” exposure class (under Article 112(k) CRR) forms of unfunded credit protection eligible in accordance Section 2 of Chapter 4, Part Three, Title 2 of the CRR may be considered in order to reduce the risk-weighted exposure amount in accordance with the methods described in Section 4 of the same chapter.    

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.

Disclaimer

The Q&A refers to the provisions in force on the day of their publication. The EBA does not systematically review published Q&As following the amendment of legislative acts. Users of the Q&A tool should therefore check the date of publication of the Q&A and whether the provisions referred to in the answer remain the same.