Criteria for rating transfer

Paragraph 62 of EBA/GL/2017/16 describes the possible approaches by means of which the rating of a third party that has a contractual or organisational relation with an obligor may be taken into account in the assessment of risk of the obligor. Depending on the nature and strength of such relation, its effects can be recognised in the rating of the obligor through one of the approaches described in points (a) to (c) of paragraph 62. Institutions should specify in their policies which types of contractual or organisational relations between third parties and the obligors are recognised in the rating of the obligor and the approach this is based on.   In order to use the ‘rating transfer’ based on paragraph 62(a) of EBA/GL/2017/16 the following conditions have to be fulfilled: there is no difference in risk between the obligor and the related party because of the existence of an appropriate guarantee provided by a third party to the obligor, which is legally binding and enforceable in all relevant jurisdictions and internal rating of the third party is assigned based on an approved rating system.   The guarantee referred to under point 1. is not a credit risk mitigation technique in the sense of points (57) and (59) of Article 4(1) CRR, because it is provided by the third party to the obligor and not to the institution. Such a guarantee is considered appropriate when a contractual agreement relation between the third parties and the obligors effectively prevents the potential default of the obligor, i.e. there are legally effective and enforceable unrestricted and unconditional provisions for preventing the potential default of the obligor.   For the purpose of the use of “rating transfer”, the existence of articles of association of the third party being a majority stakeholder granting its rights or the ability to exercise a dominant influence over the obligor would be considered insufficient. For that purpose, a guarantee or hard letter of comfort with similar effect, worded in a way considered legally binding and enforceable in the relevant jurisdiction(s) as well as fully recognised in the financial statement (including annex) of the provider of the letter, could be considered eligible, while any other form of a letter of comfort would be considered insufficient.   As per paragraph 64 EBA/GL/2017/16, the use of rating transfer should only affect the assignment to grades or pools, and cannot result in a change of exposure class, rating system or model.   See also Q&A 4598 .