PRA Issues Statement on Regulatory Treatment of Loan Guarantee Schemes
PRA published a statement in response to the changes announced to UK COVID-19 business interruption loan schemes by HM Treasury. The statement sets out PRA’s observations on whether the guarantees provided under the Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS) are eligible for recognition as unfunded credit risk mitigation under the Capital Requirement Regulation (CRR). Additionally, BoE announced that it will continue to offer three-month and one-month term Contingent Term Repo Facility (CTRF) operations on a weekly basis through May 2020, with the final operation scheduled on May 29.
PRA considers that the terms of the guarantees provided by the Secretary of State under the schemes do not contain features that would render these guarantees ineligible for recognition as unfunded credit risk protection and the effects of these guarantees would appear to justify such treatment. In accordance with CRR, firms recognizing the CBILS guarantee as eligible unfunded protection in relation to an exposure are required to adjust the exposure amount to exclude elements not covered by the CBILS guarantee. Some of the CBILS guarantees exclude cover for interest and fees.
The government is taking additional steps on CBILS to ensure that lenders have the confidence they need to process finance applications quickly, including removing the per lender portfolio cap for the government guarantee, and changing the viability tests that so that all banks will need to assess is whether a business was viable before the COVID-19 disruption. In the current extraordinary circumstances, it will be challenging for many businesses to provide forecast financial information with a high degree of confidence to support firms’ loan underwriting processes. Given that, PRA expects lenders to use their judgment on what information is required to make credit decisions. Lenders are reminded that they should consider the range of information available to them including (but not limited to) the performance of the business prior to the COVID-19 outbreak; a view of how the loan will be repaid in due course, judgment in the absence of financial forecast information; and general prospects for the sector in which the business operates once the effects of the pandemic have receded.
The government of UK also launched a new fast-track finance scheme providing loans with a 100% government-backed guarantee for lenders. The government, which has been consulting extensively with business representatives about the design of the new scheme, will provide lenders with a 100% guarantee for the loan and pay any fees and interest for the first 12 months. No repayments will be due during the first 12 months. The loans will be easy to apply for through a short, standardized online application. The loan should reach businesses within days, providing immediate support to those that need it as easily as possible. This new scheme will run alongside the existing CBILS and CLBILS.
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Keywords: Europe, UK, Banking, COVID-19, CBILS, CLBILS, Credit Risk, CRR, Regulatory Capital, HM Treasury, CTRF, Loan Guarantee, PRA, BoE
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