BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK
The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021. In this context, BoE published a statement that sets out the PRA observations on whether the guarantees provided by the Secretary of State for Business, Energy, and Industrial Strategy under the RLS are eligible for recognition as unfunded credit risk mitigation under the UK Capital Requirements Regulation or CRR. The Recovery Loan Scheme is intended to help businesses of any size access loans and other kinds of finance to support recovery from the pandemic. Under this scheme, which is open until December 31, 2021, the government guarantees 80% of finance to the lender.
The BoE statement does not provide an exhaustive description of the prudential requirements that apply to loans extended by participating banks to businesses under the RLS, nor is it a comprehensive description of the regime under which the credit risk mitigation techniques impact the calculation of risk-weighted exposure amounts. Firms are encouraged to review the relevant articles of CRR, along with any relevant PRA rules and guidance (including expectations set out in the PRA supervisory statement SS17/13 on credit risk mitigation). A guarantee is one form of unfunded credit protection which, where it meets the conditions in Articles 194 and 213-215 of CRR, may allow a firm to adjust risk-weights and expected loss amounts. Under the terms of the guarantee, the Secretary of State may set a limit on the aggregate number of claims that a lender can make for a future "Scheme Period" in respect of an RLS facility.
PRA considers that for "Scheme Periods" where the "Claim Limit" is set at not less than 100%, the terms of the guarantee provided by the Secretary of State under the RLS do not contain features that would render the guarantee ineligible for recognition as unfunded credit risk protection and the effects of the guarantee would appear to justify such treatment. Were the Claim Limit to be set lower for subsequent Scheme Periods, this guidance would not apply and the effect of the guarantee on regulatory capital requirements would need to be carefully assessed against the law and guidance applicable at the time. The statement also highlights that, in accordance with CRR, firms recognizing the RLS guarantee as eligible unfunded protection in relation to an exposure are required to adjust the exposure amount to exclude elements not covered by the RLS guarantee.
RLS will ensure businesses continue to benefit from the government-guaranteed finance throughout 2021. The scheme will be administered by the British Business Bank, with loans available through a diverse network of accredited commercial lenders. Twenty-six lenders have already been accredited for day one of the scheme, with more to come shortly. Interest rates have been capped at 14.99% and are expected to be much lower than that in the vast majority of cases. RLS can be used as an additional loan on top of the support received from the emergency schemes, such as the Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS), that were put into place last year. Although up to GBP 10 million is available per business, the actual amount offered and the terms will be at the discretion of participating lenders.
Related Links
- HM Treasury on RLS
- HM Treasury Announcement
- BoE Statement on RLS
- PRA Statement on Credit Risk Mitigation
Keywords: Europe, UK, Banking, Recovery Loan Scheme, COVID-19, CRR, Credit Risk, RLS, Regulatory Capital, Basel, Risk-Weighted Assets, HM Treasury, PRA, BoE
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
PRA Proposes Rules Related to IRB Approach for Credit RiskRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
