Credit insurance is an important tool used by banks in certain trade-financing arrangements to mitigate their credit risk exposure. The effective and efficient use of credit insurance in this way can support greater lending by banks and it is estimated by the International Trade and Forfaiting Association (ITFA) that over EUR600 billion of trade-related financing is facilitated in this way. The ongoing review of EU banking rules offers a chance to solidify and strengthen the foundations of this important business.
Ensuring appropriate recognition of credit insurance under bank prudential rules is critical to preserve and protect this important source of financing to the real economy, particularly in the EU, where it is most common. This should include clear guidance on the eligibility of the credit protection offered by credit insurance under different circumstances, application of an appropriate loss given default (LGD) to credit insurance policies, as well as recognition of fundamental characteristics of these products.
Within the EU, interactions between banks and credit insurers represent the commercial engagement of sophisticated and knowledgeable counterparties, both strongly regulated under the respective regulatory frameworks – CRR/CRD for banks and Solvency II for insurers. Therefore, the protection offered to banks by insurers within the EU is already subject to strong supervisory oversight and the robust capitalisation of the parties involved.
Proposals for amendments to both regimes have been put forward by the European Commission and will be subject to scrutiny and negotiation by the trilogue parties – the European Council, European Parliament and European Commission. Given the potential impact of these changes, ICISA is closely monitoring developments and engaging with key stakeholders at various points of these processes. Our aim is to help policymakers and regulators understand our members’ sectors and the products and services they offer.
Within the context of the EU review of banking regulations, ICISA is also working to address a number of important issues raised by the proposals. This includes working directly on behalf of our members, but also working closely with other trade associations with shared interests in seeing the recognition and effective treatment of credit insurance under the rules.
There are two areas in particular which ICISA addressed in its recent response to the proposals. The first is strongly supporting the inclusion of an enabling clause, “…mandating EBA to report to the Commission on the eligibility and the use of credit insurance as a credit risk mitigation technique and on the appropriate risk parameters they should be associated with under the SA-CR and foundation IRB approach. Based on that report, the Commission is required to submit, if appropriate, a legislative proposal on the use of credit insurance as a credit risk mitigation technique”.
The use of credit insurance as credit protection under CRR/CRD along similar lines to guarantees has been acknowledged widely by regulators, but not explicitly referenced for in the current regime. The analysis by EBA and subsequent legislative proposals should ideally lead to proper recognition of credit insurance within the banking rules, clarify the relevant eligibility criteria and acknowledge the unique characteristics of the insurance product itself.
ICISA and others have also urged clarification of a specific proposal related to the eligibility of credit protection contracts in the event of fraud by a bank’s counterparty. ICISA has encouraged further investigation into the potential impact of the proposal and any unintended consequences that it could lead to. In particular, ICISA believes this is a further point where formal recognition of credit insurance and its fundamental characteristics will be beneficial not only to banks as users of credit insurance, but also to the relevant regulatory bodies eventually tasked with implementing the new rules across the EU.
Given the importance of the overall treatment of credit insurance within banking rules – not only for members of ICISA and the banks they work with, but also the real economy businesses which benefit from the presence of credit insurance – ICISA will continue to engage with all key stakeholders as trilogue negotiations progress within the EU.
To discuss this topic in more detail, please contact Daniel de Búrca.