On 3 October 2024, the European Banking Authority (EBA) published a report (EBA/REP/2024/21) on the credit insurance (CI) mandate under Article 506 of the Capital Requirements Regulation (575/2013) (CRR) as amended by Regulation (EU) 2024/1623 (CRR III Regulation).
The EBA has highlighted the role of CI in providing credit risk mitigation (CRM) for lenders, particularly during financial crises, by covering potential losses from borrower defaults. Despite its growing importance in financial intermediation, CI represents only 0.8% of total credit risk exposure for EU institutions. There's ongoing debate about CI's effectiveness as a CRM tool, especially given the restrictions imposed by the final Basel III framework on low-default portfolios, which could limit its use.
The EBA's report examines the impact of the Basel III changes on CI, noting it will still reduce the capital requirements for banks, though not as significantly as before. The analysis considers the framework's effects on CI, including how it compares to other products and the restrictions faced by credit insurers.
Furthermore, the EBA has reviewed supervisory and industry data to evaluate the assumed conservativeness of the loss given default (LGD) models for CI, cautioning that, since no EU credit insurer has defaulted, these LGD estimates must be approached carefully. The available data does not yet provide enough evidence to support a framework re-calibration.
