Article 183
Requirements for assessing the effect of unfunded credit protection for exposures to central governments and central banks, exposures to regional governments, local authorities and public sector entities, and exposures to corporates, where own estimates of LGD are used and for retail exposures
The following requirements shall apply in relation to eligible guarantors and guarantees:
institutions shall have clearly specified criteria for the types of guarantors they recognise for the calculation of risk-weighted exposure amounts;
for recognised guarantors the same rules as for obligors as set out in Articles 171, 172 and 173 shall apply;
the guarantee shall be evidenced in writing, non-cancellable and non-changeable on the part of the guarantor, in force until the obligation is satisfied in full, to the extent of the amount and tenor of the guarantee, and legally enforceable against the guarantor in a jurisdiction where the guarantor has assets to attach and enforce a judgement;
the guarantee shall be unconditional.
For the purposes of the first subparagraph, point (d), an ‘unconditional guarantee’ means a guarantee where the credit protection contract does not contain any clause the fulfilment of which is outside the direct control of the lending institution and that could prevent the guarantor from being obliged to pay out in a timely manner pursuant to the qualifying default of the obligor or to the non-payment by the original obligor. A clause in the credit protection contract providing that a flawed due diligence or fraud by the lending institution cancels or diminishes the extent of the guarantee offered by the guarantor shall not disqualify that guarantee from being considered unconditional.
Guarantees where the payment by the guarantor is subject to the lending institution first having to pursue the obligor and that only cover losses remaining after the institution has completed the workout process shall be considered unconditional.
The criteria shall be plausible and intuitive. They shall address the guarantor's ability and willingness to perform under the guarantee, the likely timing of any payments from the guarantor, the degree to which the guarantor's ability to perform under the guarantee is correlated with the obligor's ability to repay, and the extent to which residual risk to the obligor remains.
The criteria shall address the payout structure of the credit derivative and conservatively assess the impact this has on the level and timing of recoveries. The institution shall consider the extent to which other forms of residual risk remain.
First-to-default credit derivatives may be recognised as eligible unfunded credit protection. However, second-to-default and all other nth-to-default credit derivatives shall not be recognised as eligible unfunded credit protection.