Question ID
2020_5471
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
Annex 1
Paragraph
(1)
Subparagraph
(a)
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
n.a.
Type of submitter
Other
Subject matter
Classification of a gurantees for trade finance off-balance sheet items according to annex 1.
Question
In which class according to annex 1 would guarantees for loans and guarantees for performance bonds fit? If a bank is a guarantor for another bank's transaction, where some trade finance transaction, like performance bond, was issued, how should the bank acting as guarantor classify the risk according to annex 1? Is it possible to apply Annex 1 point 1(a) or 3(a)(ii) or which else? in case of a transaction, where the bank in FI is offering a guarantee for the transaction, where another bank has issued a working capital loan, is it correct to refer to point 1(a)?
Background on the question
There are transactions, where a commercial bank is offering a guarantee for another commercial bank to secure its transaction, where a loan was issued or a trade finance product like tender or performance bond was issued. The question is raised because commercial banks, which acted as guarantors, classify both transactions (guarantees for loans and guarantees for performance bonds) as the same risk, according to Annex 1. However the initial risk of underlying transactions: loan or trade finance product is materially different. It is unclear whether it is correct to conclude that, due to the nature of underlying transactions, the credit risk of secured loan or secured trade finance transaction can’t be the same. Annex 1 gives to the guarantor the variety to distinguish the risk, depending on the exact agreement conditions. In ESIF (European structural and investment funds) it is possible to use financial instruments (FI). Those FI-s can be in form of loans, guarantees and other risk-sharing instruments. We find unclear the case of a bank in FI is offering a guarantee for a commercial bank, which has issued a trade finance transaction, like warranty (including tender and performance bonds). So, one bank is a guarantor for another bank's transaction, where some trade finance transaction, like performance bond was issued. It is unclear how the bank which act as a guarantor should classify the risk according to annex 1. The question raised because the bank which has issued guarantees classifies both transactions (guarantees for loans and guarantees for performance bonds) with same risk and classifies those as Annex 1 paragraph 1 (a) transaction. However the initial risk of underlying transactions: loan or performance bond is materially different.
Submission date
Final publishing date
Final answer

In general, the classification of a guarantee to one of the risk categories according to Annex I CRR (off-balance sheet items) depends on the characteristics and on the purpose of the guarantee itself.

 

Where the guarantee covers an on-balance sheet item which is a credit facility, such guarantee has the character of a credit substitute and needs to be assigned to the full risk category according to point (1)(a) of Annex I CRR. For instance, where guaranteeing drawn credit facilities, such as disbursed loan amounts still outstanding, a guarantee for the good payment of such credit facilities always has the character of a credit substitute according to point (1)(a) of Annex I CRR. Thus, a guarantee for a disbursed and still outstanding loan amount is always assigned to the full risk category of Annex I CRR.

 

Where the guarantee covers an off-balance sheet item, such as a counter-guarantee or a guarantee for performance bonds, the classification depends on whether the guarantee is covering a credit risk exposure or not (see Q&A 3918) and the guarantee should be assigned to the same risk category according to Annex I CRR as this off-balance sheet item that is covered by the guarantee. This can be inferred by the fact that, before a guarantee can be called, all the conditions necessary for materialising the risk of the guaranteed exposure must have occurred. Thus, for guarantees for performance bonds, the risk category according to Annex I should be that for the guaranteed performance bonds as explained by Q&As 2198, 2543, and 3918.

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

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