PRA Updates Policy for Managing Prudential Risks on Asset Encumbrance
PRA published the policy statement PS18/20 on asset encumbrance with respect to the Capital Requirements Directive (CRD) IV. PS18/20 contains the updated versions of the supervisory statements SS9/17 on recovery planning, SS24/15 on the approach to supervising liquidity and funding risks, and SS20/15 on supervising treasury and lending activities of building societies. PS18/20 also provides feedback to responses to the consultation paper CP24/19 on managing the key prudential risks associated with asset encumbrance. The policy presented in PS18/20 will become effective from the date of publication. PS18/20 is relevant to all PRA-regulated firms, except credit unions and insurance firms.
CP24/19 had set out the proposed expectations from firms in managing the key prudential risks associated with asset encumbrance, specifically in the contexts of managing liquidity and funding risks, recovery planning, and resolution. The proposed expectations relate both to firms’ internal monitoring and management of these risks and to the information that firms are expected to provide to PRA through their periodic regulatory submissions, such as the Internal Liquidity Adequacy Assessment Process documents and recovery plans. Based on the responses received to the consultation paper, PRA has made the following changes to the draft policy in SS20/15 to reflect that
- Market counterparties does not refer to central banks (paragraph 4.163)
- PRA will expect that building societies have an "appropriate" forward view of collateral available, not a "comprehensive" one (paragraph 4.91)
PRA considers that these changes are not significant and remove the potential for ambiguity. The changes in SS24/15 reflect the expectations of PRA on how firms should manage risks associated with asset encumbrance for the purpose of their resilience to liquidity stress and of the stability of their funding profile. Footnote numbers have also been updated throughout in SS24/15. Among other changes, paragraph 3.5 has an additional footnote and includes developments over time. Consequently, footnote numbers have also been updated. The changes in SS9/17 update the PRA expectations to include how firms should consider risks associated with asset encumbrance for their recovery planning. Minor formatting changes have also been made to SS9/17 to improve readability, including removing blank pages and footnote numbering.
The policy set out in PS18/20 has been designed in the context of the withdrawal of UK from EU and entry into the transition period, during which time the UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with EU take effect. PRA has assessed that this policy would not need to be amended under the EU (Withdrawal) Act 2018.
Related Links
Effective Date: Juy 27, 2020
Keywords: Europe, UK, Banking, Asset Encumbrance, Recovery Planning, ILAAP, CP24/19, PS18/20, SS24/15, SS9/17, SS20/15, Liquidity Risk, CRD IV, PRA
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.
Karen Moss
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
Previous Article
SARB Publishes Update on COVID-19 Loan Guarantee SchemeNext Article
ACPR Releases Version 4.0.0 of SFRDP TaxonomyRelated Articles
PRA Finalizes Approach to Supervision of International Banks
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.
FCA Issues PS21/9 on Implementation of Investment Firms Regime
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
EBA Proposes Regulatory Standards to Identify Shadow Banking Entities
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.
IOSCO Proposes Recommendations on ESG Ratings and Data Providers
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.
EC to Defer Application of SFDR Standards Till July 2022
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.
BoE Consults on Approach to Setting MREL, Publishes Bail-In Guidance
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.
EBA Seeks Views on Proportionality Assessment Methodology
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
US Agencies Propose Changes to Call Reports and Instructions
Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.
PRA Finalizes Rulebook Definition of Higher Paid Material Risk-Taker
The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.
EBA Examines Asset Encumbrance in Banking Sector
The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.
