European lawmakers have tabled a legislative proposal that, if passed, would improve the capital relief some EU banks get from using credit insurance.
The ability of large lenders to free up capital when they take out insurance on credit exposures was crimped this year by Basel reforms that prohibited banks from making their own assessments of credit risk.
Under rules that came into effect in January, banks must apply a loss given default (LGD) of 45% to insurance exposures. An LGD is used to estimate the expected loss to a lender in the event of a default, and the higher the LGD, the more capital banks must put aside.
But a group of European Parliament members from the Brothers of Italy party have put forward an amendment to the Capital Requirements Regulation that would trim the LGD to 22.5%, according to a Parliament document published on February 2.
The reform is among hundreds of amendments put forward as part of an overhaul of the EU’s securitisation framework, a package of reforms designed to help make the bloc more competitive.
The amendment must first be approved by lawmakers on the European Parliament’s Committee on Economic and Monetary Affairs. If it is successful at that stage, the amendment will also need to be supported by the European Commission and member states before it becomes law.
“In a time when European businesses are struggling with an uncertain trade environment and the need to innovate and grow, the EU must maximise all proven financing tools available to it,” said Daniel de Búrca, head of policy and regulatory affairs at the International Credit Insurance & Surety Association.
“The support provided by the credit insurance industry to banks is one such pathway that needs to be kept open and built upon,” he told GTR. “This amendment represents a simple way to address the gap in the banking framework that threatened this market and contributes to helping the EU achieve its wider strategic goals.”
The five MEPs who tabled the amendment did not respond to requests for comment. The European Conservatives and Reformists, the parliamentary political grouping the MEPs belong to, also did not answer questions about why they have taken up the cause.
When EU lenders apply credit insurance to an exposure, they can substitute the credit risk of the borrower for the typically much better credit risk of the insurer, reducing the amount of capital needed to be held in reserve.
But the final tranche of global Basel banking regulation reforms implemented by the EU sought to clamp down on large banks using internal models to assess credit risk, including devising their own LGDs for insurance exposures.
GTR previously reported that many lenders were applying LGDs of 20-30% or lower to insurers, meaning the mandated jump to 45% would have slashed the capital benefits of credit risk substitution.
The loss of capital relief was likely a significant contributor to banks’ usage of credit insurance remaining flat last year, after a long bout of growth in the product, according to an industry survey. Banks in some Asia Pacific jurisdictions have faced a similar situation.
The UK has also mandated a 45% LGD in its implementation of the Basel reforms, but the start date has been delayed until January 1, 2027.
