The European Banking Authority (EBA) has recently published a Report on eligibility and use of credit insurance, in response to the European Commission’ request under the Capital Requirements Regulation (CRR3). In this Report, the EBA calls for an alignment of EU rules with the present Basel framework.
The EBA had previously commented on the topic of credit insurance as a credit risk mitigation (CRM) technique. The comments were included in its Opinion published in March 2020 (‘the EBA Opinion’), which concluded that no preferential treatment was warranted based on the policy arguments and the data available at that point in time.
The Report revisits the prudential banking framework on CRM in relation to the changes affecting credit insurance that were introduced in the final Basel III framework, to take account of the level-playing field considerations compared to other products with similar features, or players subject to the same modelling restrictions as credit insurers.
In particular, the Report notes that credit insurance brings dual recourse to institutions in the event of the default of the obligor, as the bank has recourse to the credit insurer on top of the obligor, while this feature is not recognised in the Basel framework. Dual recourse is, however, a feature shared by any form of unfunded credit protection (UFCP), such as guarantees. Hence, credit insurance is not put at disadvantage compared to any form of UFCP.
Beyond the policy arguments, the EBA analysed supervisory and industry empirical data to assess the potential conservativeness of the supervisory-prescribed loss given default (LGD), subject to the caveat that no credit insurer in the European Union has so far defaulted. This analysis has led to a lack of satisfactory data evidence that could anchor any potential re-calibration of the framework and deviation from Basel.
Based on the considerations above, the Report concludes that the analysis of the theoretical framework applicable to credit insurers, as well as the empirical data available, are not sufficient to warrant a deviation for credit insurers from the international agreements.
