Mandatory substitution approach according to Articles 401(4) and 403 CRR for Lombard Facilities

Could you please clarify the applicability of Article 401(4) and 403(1)(a) for other funded credit protection such as life insurance policies pledged to the lending institution?

Lombard facilities that are within the core products distributed by private banks are by nature collateralized credits secured by liquid assets such as life insurance or stocks for instance. Lombard facilities are characterized by low cost of risks figures   supported by the high credit quality of private banks customers.  According to Article 200(b) life insurances policies pledged to lending institutions can mitigate the credit risk following the method set out in Article 232 for the capital requirement computation purpose related to credit risk. This method is further presented in the EBA report on the credit risk mitigation framework published in March 2018 and consists in substituting the risk weight of the secured part of the exposure by the risk weight of the protection provider (i.e. the life insurance company).   According to Article 399(1), large exposures requirements must reflect the credit risk mitigation techniques used for credit risk capital requirements.  According to Article 401(4), when an institution uses the substitution approach for credit risk mitigation, institution shall treat the portion of the exposure secured by a protection following the manner set out in Article 403.   In the case of a life insurance policy pledged to lending, Article 403(1)(a) applies and the portion of the exposure secured by the policy should be considered as an exposure towards the life insurance company. Provided the criteria set out in Article 403(1)(a) are met, the exposure towards the original counterparty is substituted by an exposure to the protection provider.  Since large exposures requirements include the exposures towards protection providers (including life insurance companies) in application of Articles 401(4) and 403(1)(a), the 25% limit introduced by Article 395(1) can be a limit to the distribution of Lombard facilities secured by life insurance policies.  A clarification is expected on the applicability of Articles 401(4) and 403(1)(a) for life insurance policies pledged to private banks as a collateral to Lombard facilities.