Credit risk mitigation is a technique used by firms to reduce the credit risk associated with an exposure. Credit risk mitigation can be funded or unfunded. One of the ways unfunded credit protection can be achieved is through a guarantee. That can be achieved through the obligation of a third party to pay out in the event of non-payment or default of a credit obligor.

In order to be eligible as a guarantee for credit risk mitigation under the Capital Requirements Regulation (CRR), strict eligibility criteria must be met. The PRA has identified that some firms are unclear on what contracts or other documented obligations are eligible to be treated as guarantees for credit risk mitigation under the CRR.  The PRA believes that additional clarity is needed to ensure that capital relief from guarantees is obtained only where the risk has been effectively transferred to the guarantor.

The PRA has therefore published Consultation Paper 6/18: Credit risk mitigation: Eligibility of guarantees as unfunded credit protection (CP6/18). In CP6/18 the PRA sets out proposed changes to Supervisory Statement 17/13: Credit risk mitigation to clarify expectations regarding the eligibility of guarantees as unfunded credit protection under Part Three, Title II, Chapter 4 (Credit risk mitigation) of the CRR. The deadline for comments on CP6/18 is 16 May 2018.

View Credit risk mitigation: Eligibility of guarantees as unfunded credit protection, 16 February 2018