PRA published a statement on the regulatory treatment of retail residential mortgage loans under the Mortgage Guarantee Scheme, or MGS. The statement addresses capital, notification, disclosure, and reporting requirements for retail residential mortgage loans, as set out in the UK legislation. The legislation being referred to constitutes the Capital Requirements (Amendment) (EU Exit) Regulations 2019 and the Securitization (Amendment) (EU Exit) Regulations 2019. The approach a firm uses for credit risk purposes for its UK retail residential mortgage loans—the standardized approach or the internal ratings-based, or IRB, approach—will determine how a firm calculates capital requirements for Mortgage Guarantee Scheme loans.
Under the Mortgage Guarantee Scheme, participating firms are exposed to 5% of the first loss on a Mortgage Guarantee Scheme loan. Given that firms retain the whole of the senior part of the loan, PRA considers this to be equivalent to the firm holding a 5% "vertical slice" of the underlying mortgage loan outside of the guarantee structure. Firms should calculate the capital requirements for that part of a Mortgage Guarantee Scheme loan as an exposure to the underlying mortgage loan using the IRB approach or standardized approach, as applicable. The 5% vertical slice of each Mortgage Guarantee Scheme loan outside the guarantee should be included in the calculation of the 10% loss given default (LGD) floor set out in Article 164(4) of the UK CRR. When applying the Securitization Internal Ratings Based Approach (SEC-IRBA), firms should calculate the IRB capital requirements for each Mortgage Guarantee Scheme loan. The guaranteed portion of the loan would be treated as an exposure to the UK government. In cases where firms choose not to recognize the guarantee for calculating capital requirements or where the significant risk transfer test is not met, firms should calculate capital requirements as if the guarantee did not exist and as if the underlying loan exposure had not been securitized as per Article 247(2) of the UK CRR.
The approach of PRA to capital would be applicable to mortgage insurance schemes with similar contractual features to Mortgage Guarantee Scheme, but the approach to reporting, notification, and disclosure only applies to Mortgage Guarantee Scheme and not to other securitization programs. The statement provides the following information on notification, disclosure, and reporting requirements for residential mortgage loans under the Mortgage Guarantee Scheme:
- Significant Risk Transfer Notification—Rule 3.1 of the Credit Risk Part of the PRA Rulebook requires firms to post-notify each individual transfer of significant credit risk. PRA recognizes that firms may find applying this notification requirement to each Mortgage Guarantee Scheme loan to be unduly burdensome. In this case, firms should consider applying for a modification by consent to notify PRA only once (for the whole program), following completion of the initial MGS loan securitization transaction.
- Private Securitization Notification to PRA—In line with Regulation 25 of The Securitization Regulations 2018, PRA hereby directs that participating firms submit one notification with regard to Mortgage Guarantee Scheme securitizations, detailing the estimated aggregate program size. PRA will reflect this modification as part of a broader update of the direction on its webpage in due course.
- Disclosure—PRA notes the potentially disproportionate burden associated with the firm obligation to submit regulatory templates under the Disclosure Binding Technical Standards when HM Treasury (the sole holder of the guaranteed position) has requested that information be submitted in another format to meet system requirements. In this case, PRA is not minded to enforce the use of the regulatory disclosure templates if firms have provided to HM Treasury the information that is substantively the same as that prescribed by the disclosure templates.
- Regulatory reporting—PRA is not minded to enforce where a firm reports C14 and C14.1 COREP templates on an aggregated basis for Mortgage Guarantee Scheme securitizations in respect of the reporting dates that fall within 2021. Subject to outcome of the PRA consultation on CRR rules on reporting, firms that wish to continue reporting on an aggregated basis will need to have secured a modification to the relevant CRR rule in the PRA Rulebook. PRA will consider and may, where appropriate, publish a modification by consent direction in due course.
Keywords: Europe, UK, Banking, Securities, Mortgage Guarantee Scheme, Regulatory Capital, CRR, Securitization Regulation, Basel, Reporting, Credit Risk, IRB Approach, Standardized Approach, PRA Rulebook, Disclosures, RRE, PRA
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.
The European Insurance and Occupational Pensions Authority (EIOPA) proposed to amend the supervisory statement on supervision of run-off undertakings that are subject to Solvency II regulation.
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.