Using guarantees for capital relief: legal characterisation matters

Financial institutions use a range of credit protection arrangements to mitigate minimum capital requirements under Basel III. The eligibility requirements for credit protection require consideration of the terms of the instrument in the context of the applicable legal framework. Credit insurance policies are subject to additional principles of English insurance law that can affect whether a policy is an eligible credit protection arrangement. Risk participation agreements share characteristics with credit insurance, but would not typically be considered to be insurance. This article gives an overview of the key eligibility requirements applicable to different types of guarantees, and considers the factors relevant to determining whether a risk participation should be treated as a contract of insurance.