January 10, 2019

PRA published the consultation paper CP1/19 that is proposing changes to the supervisory statement (SS17/13) on credit risk mitigation. The proposed changes clarify expectations about the eligibility of financial collateral as funded credit protection under Part Three, Title II, Chapter 4 (Credit risk mitigation) of the Capital Requirements Regulation or CRR (575/2013). This consultation closes on April 10, 2019.

The criteria for recognizing collateral as eligible for credit risk mitigation (CRM) purposes are set out in CRR Part Three, Title II, Chapter 4 (Credit risk mitigation). Where the collateral is financial collateral, these criteria include that "the credit quality of the obligor and the value of the collateral shall not have a material positive correlation" (CRR Article 207(2)). In relation to non-recourse loans, in some cases a significant fall in the value of the financial collateral can bring about the default of the obligor. As such, the creditworthiness of the obligor can depend materially on the value of the financial collateral. The risk mitigation provided by such collateral may be compromised and Article 207(2) is relevant. In view of PRA, CRR is clear on this point. However, PRA has identified some variability in how firms interpret and apply the Article 207(2) requirement. PRA considers it necessary to clarify both how Article 207(2) applies in such circumstances and PRA’s expectations of how firms should treat collateral with a material positive correlation for credit risk mitigation purposes.

The consultation proposes adding a new chapter to SS17/13, set out in the Appendix. CP1/19 is relevant to UK banks, building societies, and PRA-designated UK investment firms that are subject to CRR. In February 2018, CP6/18 titled "Credit risk mitigation: Eligibility of guarantees as unfunded credit protection" had proposed adding a Chapter 7 to SS17/13; therefore, CP1/19 proposes to add Chapter 8, subject to the outcome of CP6/18.

 

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Comment Due Date: April 10, 2018

Keywords: Europe, UK, Banking, Credit Risk Mitigation, Credit Risk, CRR, CP1/19, SS17/13, PRA