EBA · 2014_1381 Final Q&A

PD substitution and eligibility of guarantors

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
202
Topic
Credit risk
Submitted by
Credit institution
Submitted
2014-07-21
Answered
2015-09-04
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Article 202(d) of Regulation (EU) No 575/2013 (CRR) suggests that where risk weighted exposure amounts are calculated under the IRB Approach, a guarantor must have an internal rating in order to be eligible as a guarantor for PD substitution. Can a guarantor, which is rated by an ECAI, and otherwise meets all eligibility requirements but is treated under the Standardised Approach by the institution, be used for PD substitution? How can a guarantee be recognised in this situation?

Background

The CRR does not seem to deal with a situation where a Standardised entity (e.g. a AAA-rated MDB) provides a guarantee for a transaction and how that guarantee can be recognised by way of PD substitution in the IRB calculation set out in Article 153(3).

Answer

Article 202(d) of the CRR, read together with Article 236, provide inter alia for the use of the PD of the protection provider. For this purpose, the institution must have received permission to apply the IRB approach to a direct exposure to the protection provider and the PD used in this context must be that estimated using the institution's IRB approach. DISCLAIMER: This question goes beyond matters of consistent and effective application of the regulatory framework. A Directorate General of the Commission (Directorate General for Financial Stability, Financial Services and Capital Markets Union) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which the European Banking Authority publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.

Original source: European Banking Authority, Q&A ID 2014_1381

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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