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 Issues Directive to Amend Capital Framework Under Basel IIIRelated 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.