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March 13, 2019

PRA published a policy statement (PS8/19) that contains the final policy in the updated supervisory statement SS17/13 on credit risk mitigation (Appendix 1) as well as the statement SS31/15 on Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process or SREP (Appendix 2). PS8/19 also provides feedback to the responses to the consultation paper (CP6/18) that proposed changes to SS17/13 to clarify expectations about the eligibility of guarantees as unfunded credit protection under credit risk mitigation. The changes to SS17/13 and SS31/15 will be effective from September 13, 2019.

The consultation  took place from February to May 2018 and PRA had received 31 responses to CP6/18. Respondents generally welcomed the clarification of PRA expectations regarding the eligibility of guarantees as credit risk mitigation. However, several respondents raised concerns about the impact of the proposals on certain types of guarantees. Several respondents also requested further clarification on certain aspects of the proposals. Following the consideration of responses, PRA has made the following three significant changes to the proposals that were the subject of consultation in CP/18:

  • Removal of the proposal around the meaning of pay out in a timely manner
  • New expectation around risks arising from eligible guarantee arrangements
  • New expectation around recognizing any residual risks

PRA has made other changes to the draft policy which, in the opinion of PRA, are not significant. This includes minor changes to the proposal on legal effectiveness and enforceability of qualifying guarantees and to the proposal around qualifying guarantees being clearly defined and incontrovertible. Further details on these changes have been set out in Chapter 2 of PS8/19. PRA does not consider that the impact is significant, or significantly different, for mutuals. Therefore, the assessment of the impact on mutuals and the cost-benefit analysis in respect of these changes has not been updated. PS8/19 is relevant to all firms bound by the Capital Requirements Regulation (575/2013) or CRR.

 

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Effective Date: September 13, 2019

Keywords: Europe, UK, Banking, Credit Risk, Credit Risk Mitigation, CRR, PS8/19, CP6/18, ICAAP, SREP, PRA

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