Recognition of unfunded credit protection / guarantees under Advanced IRB

According to Article 108(2) CRR, for an exposure for which the risk weighted exposure amounts are to be determined under the IRB Approach by using own estimates of LGD and conversion factors under Article 151 CRR, an institution may  recognise credit risk mitigation in accordance with Chapter 3. For those exposures, Chapter 4 only applies where this is required under Chapter 3. Therefore, to recognise unfunded credit protection in the PD or LGD of an exposure, for which own estimates of LGD are used, an institution has to comply with the requirements under Article 183 CRR (which leads to applying Chapter 4 for specific cases referred to in paragraph 4 of this Article). Another method to include the effect of unfunded credit protection under Chapter 3 is described in Article 153(3) CRR which also refers to selected articles of Chapter 4. Under Article 161 CRR and the conditions described therein, unfunded credit protection for an exposure, for which own estimates of LGD have to be used, can be recognised by paragraph 3 or paragraph 4, if applicable. Article 161(3) CRR requires institutions using own LGD estimates for exposures to corporates, institutions, central governments and central banks that the adjusted risk weight of the guaranteed exposure determined by using an adjusted PD or LGD shall not be lower than that “of a comparable, direct exposure to the guarantor”. For this purpose, if the institution applies the IRB approach to a comparable direct exposure to the guarantor and has the permission to use its own estimates of LGD, the institution may determine the risk weight of a comparable, direct exposure to the guarantor by using the PD and the LGD that it would assign to such exposure. Q&A 415 specifies that this comparable and direct exposure can be calculated using the same risk-weight function. On the other hand, if a comparable, direct exposure to the guarantor would be treated under the Standardised Approach, the risk weight of such exposures for the purpose of Article 161(3) CRR should be determined in accordance with the Standardised Approach. Article 153(3) CRR is applicable irrespective of whether an institution has to use supervisory LGD values or own estimates of LGD for the respective exposures. Article 161(4) clarifies how to determine the LGD parameter for this purpose. Please see also Q&A 2013_27 . Further clarifications were provided in the EBA Guidelines on Credit Risk Mitigation for institutions applying the IRB approach with own estimates of LGDs.