PRA Letter on Modifying Rule on Minimum Provisioning Requirements
PRA issued a letter to credit unions notifying them of its decision to publish a model direction modifying a PRA rule on minimum provisioning requirements. The letter includes the detailed PRA rule modification available to all consenting credit unions from January 02, 2021 until December 31, 2022. PRA has taken this decision due to the ongoing stress credit unions face due to the COVID-19 outbreak and the importance of a credit union’s capacity to cure bad debts prior to 12 months. The letter reiterates the messages on engagement with PRA and regulatory reporting, also confirming the supervisory focus and priorities for credit unions in this period.
The modification of PRA rule on minimum provisioning requirements is identical in effect to a modification available to all credit unions, which expires on January 01, 2021. Where credit unions consent to the modification, minimum provisioning requirements for bad debt will be reduced to the rates set out below:
- 20% of the net liability to the credit union of borrowers where the amount is more than three months in arrears
- 40% of the net liability to the credit union of borrowers where the amount is more than six months in arrears
- 60% of the net liability to the credit union of borrowers where the amount is more than nine months in arrears
- 100% of the net liability to the credit union of borrowers where the amount is more than twelve months in arrears
Credit unions that have consented to the current modification must also consent to the new modification if they wish the modified rules to continue to apply to them after January 01, 2021. Credit unions can consent in advance of January 02, 2021, although the modification will not apply until that date. If taking up the modification, credit unions should be mindful of the overarching PRA requirement on provisioning and provision accordingly and appropriately. In the letter, PRA mentioned that some credit unions have changed their strategic approach to new lending and credit control amid crisis. If credit unions do make such changes, it is essential that Boards consider and accept the associated risks and the potential financial impact in the short, medium, and long term, in addition to ensuring they have focused management information that allows them to measure the success of their approach.
In the letter, PRA also emphasized on the importance of a credit union’s cure rate as an indicator. The nature of PRA provisioning requirements, whether or not a credit union consents to the modification of PRA provisioning rules, means a credit union’s capacity to cure bad debts—particularly before they reach 12 months in arrears—is a key driver in terms of financial performance. The analysis of PRA shows that credit unions that engage with members whose loans are in arrears and get them paying again before the mandatory 100% provision hits at 12 months have a much better chance of avoiding financial difficulty.
Related Links
Keywords: Europe, UK, Banking, COVID-19, Minimum Provisioning Requirement, Reporting, Credit Risk, PRA Rulebook, Credit Unions
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.
Scott Dietz
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Previous Article
EC Welcomes Declaration by Member States on EU Cloud FederationRelated 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.