Capital Engineering & Regulatory Feasibility
Validating the regulatory, economic, and operational viability of captive-backed risk transfer—so capital relief is not only theoretically possible, but executable under Basel 3.1, CRR, and supervisory scrutiny.
Beyond traditional insurance
We do not view captives solely as insurance vehicles; we analyse them as instruments for balance sheet optimisation. For financial institutions, a feasibility study must answer one question: does the all-in cost of the structure (fronting + operations + expected loss) produce a positive arbitrage versus the cost of the regulatory capital released?
Our feasibility process tests your proposed structure against Basel 3.1 (Basel IV), EU CRR (including CRR III implementation), and UK PRA expectations—ensuring the risk transfer is recognised for capital relief purposes and is robust to common supervisory challenge points.
Regulatory capital relief is only granted if the credit protection qualifies as eligible Credit Risk Mitigation (CRM). We validate structures against the strict eligibility criteria for Unfunded Credit Protection (UFCP).
- ■ Legal certainty: policy wording must be direct, explicit, irrevocable, and unconditional.
- ■ “Unconditional” clause stress test: verify the insurer cannot unilaterally cancel cover or reprice due to portfolio credit deterioration—common friction in standard trade credit policies.
- ■ LGD floor impact analysis: quantify the effect of the new 45% F-IRB LGD floor and whether risk-weight substitution remains economically viable.
As captives are typically unrated / related parties, direct protection is rarely recognised for capital relief. We engineer the fronting chain so the bank faces an eligible, rated counterparty.
- ■ Fronting selection: identify appropriately rated insurers to create immediate RWA reduction via risk-weight substitution.
- ■ Collateral efficiency: structure funds withheld or trust arrangements to secure fronting exposure without trapping liquidity inefficiently.
- ■ Mismatch mitigation: quantify and minimise haircuts from FX mismatch and maturity mismatch between assets and protection.
For complex portfolios (corporate loans, leasing), simple insurance may not be sufficient. We assess synthetic securitisation pathways where the captive assumes specific tranches.
- ■ Tranche thickness: define attachment/detachment points to support SRT tests and supervisory expectations.
- ■ Economic vs regulatory capital: use RAROC models to evidence the arbitrage of risk transfer versus holding capital on balance sheet.
- ■ Retained interest: structure first-loss retention to align incentives and address moral hazard concerns flagged by supervisors.
Regulators increasingly scrutinise rollover risk and the economic substance of risk transfers. We include a governance stress test so the structure remains durable through market cycles.
- ■ Rollover risk planning: contingency design for market hardening and renewal constraints to avoid a capital “cliff edge”.
- ■ Arm’s length pricing: premium / TP logic suitable for tax authorities and supervisors to evidence true risk transfer.
- ■ Implicit support controls: policies to avoid non-contractual support that could negate capital relief in stress scenarios.
The Capital Engineering Blueprint
You receive a blueprint that makes the capital case explicit—linking regulatory eligibility, execution mechanics, and net economic benefit.
- RWA & RWA density projections: comparative modelling pre- and post-transaction under Standardised and IRB approaches.
- Regulatory opinion memorandum: structured assessment of CRM eligibility and (where relevant) Significant Risk Transfer considerations.
- Net economic benefit analysis: waterfall covering fronting fees, ceding commissions, expected loss, captive operating costs vs cost of equity released.
- Implementation roadmap: step-by-step execution plan (fronting engagement, collateral trust, documentation, and supervisory notifications).
A defined, time-bounded feasibility engagement designed to answer one question: does the structure create a positive arbitrage between capital released and all-in structure cost?
- ■CFO / Treasury teams under Basel 3.1 constraints
- ■Portfolios where RWA inflation is limiting growth
- ■Institutions evaluating UFCP, fronting, or SRT pathways