Credit risk mitigation - CRR Provision: Difference between revisions

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Article 193 of CRD IV:
[[Credit risk mitigation]] is defined, rather airily, inArticle 4(57) of the {{eureg|575|2013|}} as:
{{crrquote|{{CRR Article 4(57)}}|4(57)}}
The concept of [[credit risk mitigation techniques]] originates in the {{tag|Basel}} regulatory framework, which is in turn implemented by {{tag|CRR}}. {{tag|Basel}} is a little more specific, but still has a bit of the “[[Brexit means Brexit]]” about it.
===[[CRM technique]]s===
{{crmtechniques}}


{{box|
===See also===
===Article 193===
*Article {{crdprov|193}} of {{tag|CRD IV}}:
====Principles for recognising the effect of credit risk mitigation techniques====
*Article {{crdprov|194}} of {{tag|CRD IV}}
1. No exposure in respect of which an institution obtains credit risk mitigation shall produce a higher risk-weighted exposure amount or expected loss amount than an otherwise identical exposure in respect of which an institution has no credit risk mitigation. <br>
*Article {{crdprov|272(4)}} of {{tag|CRD IV}}
2. Where the risk-weighted exposure amount already takes account of credit protection under Chapter 2 or Chapter 3, as applicable, institutions shall not take into account that credit protection in the calculations under this Chapter. <br>
 
3. Where the provisions in Sections 2 and 3 are met, institutions may amend the calculation of risk-weighted exposure amounts under the Standardised Approach and the calculation of risk-weighted exposure amounts and expected loss amounts under the IRB Approach in accordance with the provisions of Sections 4, 5 and 6. <br>
{{anat|crr}}
4. Institutions shall treat cash, securities or commodities purchased, borrowed or received under a repurchase transaction or securities or commodities lending or borrowing transaction as collateral. <br>
5. Where an institution calculating risk-weighted exposure amounts under the Standardised Approach has more than one form of credit risk mitigation covering a single exposure it shall do both of the following:
:(a) subdivide the exposure into parts covered by each type of credit risk mitigation tool;
:(b) calculate the risk-weighted exposure amount for each part obtained in point (a) separately in accordance with the provisions of Chapter 2 and this Chapter. <br>
6. When an institution calculating risk-weighted exposure amounts under the Standardised Approach covers a single exposure with credit protection provided by a single protection provider and that protection has differing maturities, it shall do both of the following:
:(a) subdivide the exposure into parts covered by each credit risk mitigation tool;
:(b) calculate the risk-weighted exposure amount for each part obtained in point (a) separately in accordance with the provisions of Chapter 2 and this Chapter.
===Article 194===
====Principles governing the eligibility of credit risk mitigation techniques====
1. The technique used to provide the credit protection together with the actions and steps taken and procedures and policies implemented by the lending institution shall be such as to result in credit protection arrangements which are legally effective and enforceable in all relevant jurisdictions.  <br>
The lending institution shall provide, upon request of the competent authority, the most recent version of the independent, written and reasoned legal opinion or opinions that it used to establish whether its credit protection arrangement or arrangements meet the condition laid down in the first subparagraph. <br>
2. The lending institution shall take all appropriate steps to ensure the effectiveness of the credit protection arrangement and to address the risks related to that arrangement.  <br>
3. Institutions may recognise funded credit protection in the calculation of the effect of credit risk mitigation only where the assets relied upon for protection meet both of the following conditions: <br>
:(a) they are included in the list of eligible assets set out in Articles 197 to 200, as applicable;  <br>
:(b) they are sufficiently liquid and their value over time sufficiently stable to provide appropriate certainty as to the credit protection achieved having regard to the approach used to calculate risk- weighted exposure amounts and to the degree of recognition allowed.  <br>
4. Institutions may recognise funded credit protection in the calculation of the effect of credit risk mitigation only where the lending institution has the right to liquidate or retain, in a timely manner, the assets from which the protection derives in the event of the default, insolvency or bankruptcy — or other credit event set out in the transaction documentation — of the obligor and, where applicable, of the custodian holding the collateral. The degree of correlation between the value of the assets relied upon for protection and the credit quality of the obligor shall not be too high.  <br>
5. In the case of unfunded credit protection, a protection provider shall qualify as an eligible protection provider only where the protection provider is included in the list of eligible protection providers set out in Article 201 or 202, as applicable.  <br>
6. In the case of unfunded credit protection, a protection agreement shall qualify as an eligible protection agreement only where it meets both the following conditions:  <br>
:(a) it is included in the list of eligible protection agreements set out in Articles 203 and 204(1); <br>
:(b) it is legally effective and enforceable in the relevant jurisdictions, to provide appropriate certainty as to the credit protection achieved having regard to the approach used to calculate risk-weighted exposure amounts and to the degree of recognition allowed;  <br>
(c) the protection provider meets the criteria laid down in paragraph 5.  <br>
7. Credit protection shall comply with the requirements set out in Section 3, as applicable.  <br>
8. An institution shall be able to demonstrate to competent authorities that it has adequate risk management processes to control those risks to which it may be exposed as a result of carrying out credit risk mitigation practices.  <br>
9. Notwithstanding the fact that credit risk mitigation has been taken into account for the purposes of calculating risk-weighted exposure amounts and, where applicable, expected loss amounts, institutions shall continue to undertake a full credit risk assessment of the underlying exposure and be in a position to demonstrate the fulfilment of this requirement to the competent authorities. In the case of repurchase transactions and securities lending or commodities lending or borrowing transactions the underlying exposure shall, for the purposes of this paragraph only, be deemed to be the net amount of the exposure. <br>
10. EBA shall develop draft regulatory technical standards to specify what constitutes sufficiently liquid assets and when asset values can be considered as sufficiently stable for the purpose of paragraph 3. <br>
}}

Latest revision as of 11:55, 9 November 2016

Credit risk mitigation is defined, rather airily, inArticle 4(57) of the 575/2013/ (EUR Lex) as: 4(57) credit risk mitigation means a technique used by an institution to reduce the credit risk associated with an exposure or exposures which that institution continues to hold;

— Section 4(57), CRR

View Template

The concept of credit risk mitigation techniques originates in the Basel regulatory framework, which is in turn implemented by CRR. Basel is a little more specific, but still has a bit of the “Brexit means Brexit” about it.

CRM techniques

CRM techniques under the Basel Standardised Approach to Credit Risk framework are broken down as follows:

Now note a fundamental difference between legally enforceable netting arrangements and Guarantees: In a netting arrangement the full value of the offsetting transaction fully and automatically cancels out the corresponding exposure. There are no contingencies. By contrast, collateral arrangements that don’t amount to enforceable netting arrangements, guarantees and CDS transactions all depend for their effectiveness on the solvency of the person providing the credit mitigation – if the credit support provider fails, so does the credit mitigation and the exposure remains.

Credit risk mitigation against exposure negation

Note the difference between techniques which mitigate a credit risk that you nonetheless have — as above — and those which negate the credit exposure in the first place.

So, par example:

See also

Regulatory Capital Anatomy™
The JC’s untutored thoughts on how bank capital works.

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  1. ↑ This is what it says, and I suppose it is true, even though “hedging” is a curious way of describing it.
  2. ↑ In many cases (e.g. the ISDA Master Agreement a collateral arrangement will be delivered under a “transaction”, and so will explicitly be a master netting arrangement.
  3. ↑ Do not get me started on rehypothecation.
  4. ↑ Assuming you get the legals right...
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