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
Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Previous Article
FSB and IMF Set Out Progress on Phase Two of Data Gaps InitiativeRelated Articles
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA Issues Erratum for Technical Package on Reporting Framework 3.0
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
EBA Publishes Risk Dashboard for Third Quarter of 2020
EBA published the quarterly risk dashboard, along with the results of the Risk Assessment Questionnaire survey among 60 banks and 15 market analysts.
ECB Analysis Shows Privacy as Biggest Concern in Use of Digital Euro
ECB concluded the public consultation on the introduction of a digital euro in EU.
ECB Finalizes Guide on Supervisory Approach to Bank Consolidation
ECB published a guide that sets out the supervisory approach to consolidation in the banking sector.
SRB Chair Outlines Work Priorities for 2021
The SRB Chair Elke König published an article setting out work priorities for 2021.
FDIC Selects Companies to Compete in Final Phase of Tech Sprint
FDIC has selected 11 technology companies—including BearingPoint, Fed Reporter, Inc, and S&P Global Market Intelligence, LLC—for inclusion in the third and final phase of the rapid prototyping competition.
