Standardized guarantees
Recommendations
Treat the provision for standardized guarantees as financial assets
and liabilities.
Create a new financial instrument “standardized guarantees” under
insurance technical reserves.
Standardized guarantees are assets of creditors and liabilities of
guarantors.
Two options are being considered:
(a) Treat similar to insurance (premiums and claims treated as
current transfers)
(b) Treat simply as financial instruments.
1
Standardized guarantees
The output of guarantor, property income, and balance
sheet positions are same in both options.
Main differences in recording of premiums and claims
Insurance approach – current and financial accounts.
Financial instrument approach – financial and other
flows accounts.
As a result, net lending/borrowing will differ.
Financial position of the lender is overstated where
guaranteed instrument is valued at nominal – loan at
nominal value plus expected loss.
2
Standardized Guarantees
Simple
R/A
Premiums
Claims
Insurance
U/L
Cur
A/C
R/A
U/L
6
10
Property income
Cash
G, when sold
Fin
A/C
-10+X
-10+X
X
X
G, claims inc
10
G, prepaid
-6
G, claims paid
G, actual claims
G, expiry of risk
-10
Other
flows
-10
10
-6
3
Activation of One-off guarantees
Not standardized and do not meet the criteria for financial
derivatives
Examples: parent guarantees debt of a subsidiary,
government guarantees of worthy private projects.
Recommendation to continue as contingent asset, but with
higher prominence of memorandum item.
Clarify treatment of flows arising from activation.
4
Activation of One-off guarantees
Activation involves flows among three parties.
Specific flows arising from activation should be
recorded on the basis of contractual arrangements and
specific circumstances (such as when the unit
concerned no longer exists) either as a capital transfer
or a financial transaction (including increases in
existing equity participation) or other changes in
volume of assets. (Recommendation 13)
This recommendation is consistent with existing guidelines
that focus only on guarantor, but elaborates the changes in
balance sheets of all three involved parties.
5
Activation of One-off guarantees
The debtor continues to exist
Creditor and guarantor
• Creditor acquires financial assets (may be, a loan) on the guarantor, a
financial transaction.
Original debtor and creditor
• The liability of the original debtor is recorded as if repaid (financial
transaction).
Guarantor and original debtor
• Should be determined on the basis of the contractual agreement, if
such exists.
– Guarantor obtains financial claims, including increase in existing
equity, if guarantor obtains such claims as a result of activation.
– A capital transfer to debtor, if guarantor does not seek
repayment.
6
Activation of One-off guarantees
The debtor is liquidated
Guarantor’s claim and original debtor’s liability are
written-off (other flows).
A capital transfer from guarantor to creditor is recorded
for the compensation of loss as a result of debtor’s
liquidation.
7
Activation of One-off guarantees
The activation may or may not require payment at once.
Following accrual accounting, the amount of debt assumed
will be recorded at the time of activation.
Actual settlements (of principal and/or interest accruals)
are recorded as they occur.
8
Activation of One-off guarantees
Recommendation 14
One-off guarantees granted to corporations in certain welldefined financially distressed situations and with a very
high likelihood to be called might be treated as if these
guarantees are called at inception.
9