Alert Regulatory Update

Dear ITFA Members,

1. Great progress has been made in 2022 by the Regulatory Sub-Committee of the ITFA Insurance Committee working closely with Afore Consulting in achieving wide European member state support for the enabling clause, Article 506, included in the EU CRR 3 draft*. This clause drives the EBA (European banking regulator) in conjunction with EIOPA (insurance regulator) to propose under a Report a reasonable loss given default ratio, recognising the effective nature of credit insurance and allowing banks to continue to use the product to support the real economy in trade and beyond.
2. The next critical step is coming in the summer of 2023 no later than 1 September 2023 where we are hopeful that a transition or “phase-in” arrangement will be legally confirmed allowing banks (advanced and standard-approach banks) to apply a reasonable loss given default ratio (that is lower than the 45% level proposed in Finalised Basel 3 (aka Basel 4)) when using credit insurance until at least 1 January 2029 while the EBA and EIOPA prepare their Report – 1 January 2029 is the likely implementation date of the EBA/EIOPA Report that is due to be released on 1 January 2027, in accordance with Article 506*.
3. Since Finalised Basel 3 is due to be implemented on 1 January 2025, we see the transition arrangement as our most critical issue for advocacy: we need to avoid banks having to manage a “cliff effect” on their stock of insured deals and subsequent ones after 1 January 2025 that could induce a change of credit insurance buying habits in the short term as that date approaches.
4. Additionally, we are focused on engaging with the UK regulators, the PRA and the Treasury, on the same topics for which we will reply to a consultation by 31 Jan 2023 (HMT) and by 31 March 2023 (PRA). 
5. Why does this matter? The current proposals for Finalised Basel 3 prescribe high loss given default floors that would reduce the risk weight efficiency of transactions with credit insurance. The impact is that banks on average could have to at least double their risk weighted assets on an insured deal. These floors are not deemed appropriate when due consideration is given to the impact of credit insurance on default scenarios and to the dual recourse provided.
6. It is clear that the effectiveness of credit insurance is a vital support to banks’ lending. Any reduction in its application will have the unfortunate effect of (i) reducing lending to the real economy, at a time when bank finance to corporates is critically needed, or (ii) increasing the cost of lending to the real economy, at a time when corporates have to factor in their cost of borrowing increased base rates from Central Banks.

* Footnote:
The Capital Requirements Regulation 3 forms part of the latest Banking Package (https://finance.ec.europa.eu/publications/banking-package_en). The latest draft amendments to CRR 3 can be found at https://data.consilium.europa.eu/doc/document/ST-13772-2022-INIT/en/pdf The key clause for credit insurance is Article 506 on page 443 of 453.

Kind regards,

ITFA Insurance Committee