HM Treasury has issued a letter that explains its stance on the recently adopted EU proposals amending the Capital Requirements Regulations (both CRR and CRR 2) with respect to adjustments in response to the COVID-19 pandemic. The letter highlights that only the CRR elements (including relevant amendments under CRR2 and as part of recent “quick fix” proposal) that apply before the end of the transition period will become retained in EU law. The annex to the letter seeks to provide further clarity on the elements of these recent amendments to CRR and CRR2 that will and will not apply in UK.
The letter highlighted that the government broadly supports the package introduced by EC in light of the COVID-19 pandemic. The government welcomes the measure to adjust the transitional arrangements to mitigate the impact of IFRS 9. This measure will take effect before the transition period and will, therefore, be implemented in the UK. However, the proposal to introduce a temporary measure to apply favorable treatment of unrealized gains and losses for exposures to certain public-sector entities would be considered a deviation from Basel. EU has introduced this measure to mitigate the potential negative impact of volatility in central government debt markets on banks’ regulatory capital and, therefore, their capacity to lend during the COVID-19 crisis. This measure would be directly applicable to minimum capital requirements. However, if necessary, action could be taken by PRA under the Pillar 2 framework to mitigate any financial stability concerns.
The letter also noted that temporary exemption of central bank exposures from the leverage ratio and relief for regular way purchases and sales awaiting settlement will form part of retained EU law, as it applies before the end of the transition period, but its exercise is discretionary. Such exclusions would be subject to supervisory authorities consulting with central banks to declare that extraordinary circumstances exist and, therefore, central bank exposure exclusions should apply. In the UK, such exclusions already apply under the leverage ratio framework. Under this framework, some firms face a binding minimum capital requirement based on their leverage ratio, which has already been adjusted to exclude central bank exposures. The letter noted that proposals related to changes to the way central bank exposures are offset from the calculation of the leverage ratio and the delaying of the application of the new leverage ratio buffer requirement for Globally Systemically Important Banks (G-SIBs) by one year will not form part of the retained EU law as they both apply after the transition period. These measures have already been implemented for some firms in the UK within the leverage ratio framework. The changes to CRR shall not affect the operation of the UK leverage ratio framework.
Other key measures that will be implemented in the UK at the end of the transition period include mitigating against the impact of market risk volatility for the firms using internal models and extending prudential treatment to non-performing loans guaranteed by COVID government schemes.
Keywords: Europe, UK, Banking, COVID-19, Basel, CRR, CRR2, IFRS 9, Pillar 2, Leverage Ratio, HM Treasury, Brexit Transition, EC, PRA
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