4. General provisions

In accordance with Article 108(2) of Regulation (EU) No 575/2013, institutions that apply the IRB approach by using their own estimates of LGD in accordance with Article 143(2) of that Regulation may recognise credit risk mitigation in accordance with Part Three, Title II, Chapter 3 of that Regulation. Institutions may recognise credit risk mitigation in accordance with Part Three, Title II, Chapter 4 of Regulation (EU) No 575/2013 where those requirements are referred to in Part Three, Title II, Chapter 3 of that Regulation and in accordance with these guidelines.

For the purposes of Article 181(1) of Regulation (EU) No 575/2013, any reference to the term ‘collateral’ should be understood as a reference to funded credit protection other than the funded credit protection referred to in Article 166(2) and (3) of that Regulation. This includes, in particular, funded credit protection other than master netting agreements and on-balance sheet netting. Credit risk mitigation effects of master netting agreements and on-balance sheet netting are reflected in the exposure value. Therefore, for the types of exposures where institutions have received permission to use own LGD estimates, institutions may recognise funded credit protection in accordance with Article 181(1) of Regulation (EU) No 575/2013 only where that protection has not already been recognised in the exposure value for the cases specified in Article 166 of that Regulation and in line with paragraph 13.

The credit risk mitigation effects of on-balance sheet netting should be recognised in the exposure value in accordance with Article 166(3) of Regulation (EU) No 575/2013 and the credit risk mitigation effects of master netting agreements should be recognised in the exposure value in accordance with Article 166(2) of that Regulation. In recognising the effects of on-balance sheet netting and master netting agreements, institutions should take into account all requirements related to these techniques specified in Part Three, Title II, Chapter 4 of Regulation (EU) No 575/2013, including the eligibility criteria and the methods for recognising the risk mitigation effects of such instruments.

For the types of exposures for which they have received permission to use own LGD estimates, institutions should recognise the effects of the unfunded credit protection in accordance with Article 160(5), Article 161(3), Article 164(2)–(3) and Article 183 of Regulation (EU) No 575/2013.

Institutions may recognise credit insurance in accordance with paragraph 14 if the associated techniques of credit risk mitigation can be classified as unfunded credit protection according to the definition in point (59) of Article 4(1) of Regulation (EU) No 575/2013. In particular, institutions may recognise the credit insurance according to Article 183(1) of Regulation (EU) No 575/2013 and Article 183(2) or 183(3) of Regulation (EU) No 575/2013 depending on whether credit insurance effectively functions like a guarantee or like a credit derivative respectively.

The treatment of ratings of third parties presented in paragraphs 62 to 64 of the EBA GL on PD and LGD estimation, taking into account the definition of credit risk mitigation in accordance with point (57) of Article 4(1) of Regulation (EU) No 575/2013, should not be considered a method for recognising credit risk mitigation effects, and it is not covered by the scope of these guidelines. In particular, the appropriate guarantee referred to in paragraph 62(a) of those guidelines relates to a type of contractual support provided by a third party to the obligor and hence it does not constitute a credit risk mitigation technique used by an institution in the sense of points (57) and (59) of Article 4(1) of Regulation (EU) No 575/2013.