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Counterparty Default Risk (Type 2)

Counterparty Risk

Calculate the Type 2 Default Risk Capital instantly.

#
CategoryAge of DebtGross Amount (EUR)Collateral / Guarantees (EUR)
1
€
€
2
€
€
3
€
€
4
€
€

Current Charge

€420 000

15% × current LGD

Overdue Charge

€1 080 000

90% × overdue LGD

SCR Def,2

€1 500 000

Simple sum

Entered Rows

4

Receivable rows with populated balances

Chargeable Rows

4

Rows with positive net LGD

Gross Receivables

€4 300 000

Before collateral or guarantees

Collateral

€300 000

Deducted before Article 202 factors

Current LGD

€2 800 000

Receivables due within three months

Overdue LGD

€1 200 000

Receivables overdue beyond three months

Fully Collateralized Rows

0

Rows reduced to zero net LGD

Largest Row Charge

€765 000

Intermediary / > 3 Months

Receivable Loss-Given-Default and Capital Build

CategoryAgeGrossCollateralLGDShockCharge
1

Policyholder

< 3 Months
€2.4M
€250 000
€2.2M
15%
€322 500
2

Intermediary

Overdue
> 3 Months
€900 000
€50 000
€850 000
90%
€765 000
3

Other

< 3 Months
€650 000
€0
€650 000
15%
€97 500
4

Policyholder

Overdue
> 3 Months
€350 000
€0
€350 000
90%
€315 000

Article 202 Flat Factors

Age of DebtApplies ToShock Factor
< 3 Months
Current policyholder, intermediary, and other Type 2 receivables
15%
> 3 Months
Receivables overdue by more than three months
90%
1Step 1

Calculate net LGD for each receivable row

LGDr=max⁡(Grossr−Collateralr, 0)LGD_r = \max\left(Gross_r - Collateral_r,\ 0\right)
2Step 2

Apply the current receivables factor to balances due for less than three months

SCRcurrent=∑r∈<3mLGDr×15%SCR_{current} = \sum_{r \in <3m} LGD_r \times 15\%
3Step 3

Apply the overdue factor to balances due for more than three months

SCRoverdue=∑r∈>3mLGDr×90%SCR_{overdue} = \sum_{r \in >3m} LGD_r \times 90\%
4Step 4

Add the two bucket charges without diversification

SCRdef,2=SCRcurrent+SCRoverdueSCR_{def,2} = SCR_{current} + SCR_{overdue}

Understand the Counterparty Default Risk (Type 2)

Overview

This calculator implements the gross capital requirement for the Counterparty Default Risk (Type 2) sub-module within the Solvency II standard formula. The Type 2 requirement is defined as the economic capital necessary to cover the loss in basic own funds resulting from a 1-in-200 year stress event affecting unrated and diversified receivables-style exposures.[1][2]

Input Terms

  • Category: The source of the receivable (e.g., Policyholder, Intermediary, or Other), used for operational mapping and valuation context.
  • Age of Debt: The duration the balance has been outstanding, specifically whether it is due for less than or more than three months.
  • Gross Amount: The carrying amount of the receivable on the Solvency II balance sheet before risk-mitigation adjustments.
  • Collateral / Guarantees: The value of eligible risk-mitigation assets available to offset the counterparty exposure.
  • Overdue Type 2 Exposure: Receivables that have been due for more than three months, subject to higher regulatory capital factors.

Technical Rationale

The Type 2 capital requirement is calibrated to a 99.5% confidence level over a one-year horizon. Unlike the stochastic Type 1 model, Type 2 uses a prescribed flat-factor treatment to reflect the operational nature of diversified receivables.[1]

The calculation applies a 15% factor to non-overdue receivables and a 90% factor to those overdue by more than three months. This significant step-up reflects the regulatory assumption that aging receivables represent a substantially higher risk of non-payment. The final requirement is the sum of these factor-adjusted LGDs, which is then carried into the diversified Counterparty Default Risk module.

Important Notes

  • Rulebook build: The Standard Formula sheet keeps the row-level inputs high level but still applies the Article 202 bucket logic to each receivable row using `LGD = max(Gross Amount - Collateral / Guarantees, 0)`.
  • Age-Bucket Sensitivity: The 90% factor for overdue receivables makes accurate aging classification critical. Misclassification of balances near the three-month threshold can lead to material distortions in the capital requirement.
  • LGD Calculation: On the standard-formula path, the Loss-Given-Default is calculated as the gross balance minus eligible collateral or guarantees, floored at zero to prevent negative exposures.
  • Gross vs. Net SCR: This calculator determines the standalone Counterparty Default Risk (Type 2) SCR. Solvency II risk is only finalized as a net impact on Basic Own Funds after diversification in Counterparty Risk, then within BSCR, and after the top-level LAC TP and LACDT adjustments.
  • Regulatory deviation: Material deviation from standard-formula assumptions at this layer may support a capital add-on or a move toward an internal model where justified.[3]
  • Reporting: The displayed result is intended to support the corresponding standard-formula component feeding the S.25.01 standard-formula reporting view.[4]

Sources

  1. Delegated Regulation (EU) 2015/35 - Art. 202 (Type 2 exposures) - EIOPA
  2. Directive 2009/138/EC - Art. 101 (99.5% VaR / 1-in-200 calibration) - EIOPA
  3. Directive 2009/138/EC - Art. 37 (Capital add-on) - EIOPA
  4. Commission Implementing Regulation (EU) 2015/2450 - QRT S.25.01 - EUR-Lex

Default values are illustrative sample inputs for navigation, training, and QA. Replace them with controlled data before using the result in capital analysis, governance, or reporting decisions.