LMA submits Basel III recommendations

The use of non-payment insurance by banks should be recognised in regulatory capital calculations, according to the Lloyd’s Market Association. This was the core message in the association's response to the European Commission’s consultation on implementation of the Basel III reforms.

The EC is consulting stakeholders on proposed changes to the Capital Requirement Regulation (CRR) and the Capital Requirements Directive (CRD), which will define acceptable components of banks’ regulatory capital.

The LMA seeks to ensure that the proposed changes acknowledge the unique characteristics of non-payment insurance and the benefits to banks of using such insurance for credit risk mitigation. The consultation response urges the EC both to accept insurers’ substantial financial strength, and to account for banks’ privileged position as policyholders, which is protected by law.

It also emphasises the unique CRM strengths of non-payment insurance, widely underwritten at Lloyd’s and by other insurers.

The LMA stressed that, as policyholders, insured banks’ exposure to insurers is not comparable to direct creditor exposures to insurers, since statutory provisions protect the privileged position of policyholders.

Chairman of the LMA Political Risks, Credit and Financial Contingencies Business Panel and Global Practice Leader Political Lines at Talbot Underwriting, James Bamford said, “A contract of insurance provides enhanced characteristics as a Credit Risk Mitigation, to which we are asking the EC to give full consideration in respect of the proposed changes to the CRR and CRD.”

Head of non-marine insurance at the LMA, David Powell added: “The insurance industry is extremely well-regulated and well-capitalised. We are asking the EC to avoid any changes that could disrupt vital CRM support to banks, especially in sectors where other forms of risk transfer are difficult to obtain.”

Between 2007 to 2018, claims totalling the equivalent of over £2.4bn were made by financial institutions under non-payment policies, of which 97% were paid in full and on time.

Image copyright: European Union, 2019

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