EBA · 2022_6644 Rejected question

Use of the substitution approach for retail exposures treated under IRB with a guarantee (unfunded credit protection)

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
403
Topic
Large exposures
Submitted by
Credit institution
Submitted
2022-12-01
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Question

The institution has exposures to retail clients (mortgage loans) that are treated under IRB. Some of these exposures have a guarantee (unfunded credit protection) that is eligible in accordance with the relevant requirements of credit risk mitigation. The institution applies Article 163 (4) and 164 (2) and adjusts PD or LGD estimates subject to requirements as specified in Article 183(1), (2) and (3) and the permission of the competent authorities. Does the institution has to use the substitution approach for this guarantee for large exposures (and thus present the counterparty giving the guarantee, and the guaranteed amount given as indirect exposure as financial guarantee under the large exposure reporting) as indicated in Article 403 (1)a?

Background

Under the IRB approach, the PD or LGD for retail mortgage loan exposures is adjusted for received guarantee (of the Dutch Waarborgfonds Eigen Woningen with the Nationale Hypotheek Garantie) which is deemed as eligible. Therefore for credit risk calculation we deem that the guarantee is an eligible form of CRM and Article 399 (1) is applicable for large exposures. Article 399 (2) refers to Artcile 403 for unfunded credit protection and to Article 402 for mortgage loans. However Article 399 (3) states that 'credit risk mitigation techniques which are available only to institutions using one of the IRB approaches shall not be used to reduce exposure values for large exposure purposes, except for exposures secured by immovable properties in accordance with Article 402'. Therefore it is not entirely clear if for exposures treated under IRB with a guarantee for which Article 163 (4) and 164 (2) is applied, the substitution approach as described under Article 403 is to be used for large exposures.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2022_6644

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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