The EU is weighing tighter rules on a riskier type of insurance used by banks, even as it advances a broader plan to make securitized finance easier to use. Under Ireland's rotating presidency, the bloc wants to wrap up a legal package to help channel fresh funding toward priorities such as defense and climate resilience. Ahead of a key meeting later this week, officials pointed to the 2008 financial crisis bailout of American International Group Inc as a warning against going too far in loosening credit protection rules. The European Commission's representative declined to comment.
Unfunded credit protection is a promise to cover losses on a defined bank loan book, so the bank depends on the insurer's capacity and willingness to pay when losses hit. Funded SRTs, by contrast, park liquid assets up front to absorb potential losses. Insurers expanding in unfunded SRTs include Munich Re AG, AXA SA, AXIS Capital and Liberty Mutual. On the banking side, recent unfunded credit protection activity has involved Unicredit SpA, BNP Paribas SA and BBVA SA, while Credit Agricole SA is weighing an insurance-targeted SRT tied to lending to European car dealerships.
"We should not forget the case of AIG, which ran into serious difficulties during the 2008 financial crisis also linked to the use of unfunded credit protection," Commission officials wrote. AIG had sold credit cover totaling hundreds of billions of dollars across fixed-income assets, among them instruments tied to subprime mortgages. The note adds that taking on credit risk without posting funds can leave the financial sector exposed to multiple threats when defaults climb.
Beyond counterparty risk, the memo highlights legal risk if the protection seller disputes whether a credit event occurred, and settlement or liquidity risk if compensation is delayed. To qualify for more lenient capital treatment as "resilient," the paper says these deals should meet credit quality and disclosure standards and insurers should have kept solvency ratios above set levels over the prior three years. It also calls for at least two protection providers per transaction and clauses to replace an insurer if its rating falls below a minimum threshold.
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Supervisors would need to check banks' concentration risk from SRTs, while EIOPA and the European Systemic Risk Board would assess concentration at insurers and potential systemwide effects in the EU.
SRTs typically insure the first or junior slice of a portfolio, with coupons that regularly exceed 10 percent, while lenders usually retain the senior slice. The policy hinge is how much capital banks must hold against unexpected losses on the senior piece, which would decide whether a 5 percent or 7 percent risk floor applies. Market growth is brisk: underlying loan pools at inception climbed to 159 billion euros from 132 billion euros in 2024, with corporate loans the largest segment in 2025, according to IACPM.
And insurers plan to step up involvement, expecting to take part in around 50 percent more SRTs than in 2025, based on an August poll of 14 global insurers and reinsurers conducted by the group. The bottom line: whichever way the rules land will shape capital relief for banks, the risk load for insurers, and pricing for these transfers. Watch how resilience tests, dual-provider requirements and the 5 percent versus 7 percent floor debate filter into deal terms and spreads.
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