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