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    PRA Consults on Management of Prudential Risks on Asset Encumbrance

    September 30, 2019

    PRA set out, via CP24/19, 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 the 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 Internal Liquidity Adequacy Assessment Process (ILAAP) documents and recovery plans. This consultation closes on January 17, 2020.

    The proposals relate to expectations on firms’ compliance with specific aspects of the existing PRA rules—namely those in the Internal Liquidity Adequacy Assessment (ILAA), Recovery Planning, and Resolution Pack Parts of the PRA Rulebook. PRA would give effect to the expectations proposed in CP24/19 by way of amendments to the supervisory statements SS24/15 on PRA approach to supervising liquidity and funding risks (Appendix 1); SS9/17 on recovery planning (Appendix 2); and SS20/15 on supervising building societies’ treasury and lending activities (Appendix 3). The policy proposals involve amendments to the existing supervisory statements to clarify the following:

    • Firms should consider appropriately and thoroughly the potential impact that asset encumbrance can have on their funding profiles and put in place adequate risk management processes that include monitoring key metrics at appropriate committees, with clearly defined accountability for risk management, setting limits where appropriate.  Firms should document these adequately in their ILAAP documents.
    • Building societies should manage their asset encumbrance in line with existing expectations and proposed expectations of PRA that have been set out in SS20/15 as well as with the proposed expectations of PRA for all firms in SS24/15 and SS9/17.
    • Firms should appropriately consider the effects that increased asset encumbrance might have on their abilities to maintain or restore their financial viability during a variety of stress scenarios.
    • Firms should ensure that their levels of asset encumbrance do not unduly impair the amount and cash value of the assets that could be lent against in resolution, including by BoE within its usual risk tolerance.

    CP24/19 is relevant to all PRA-authorized firms, except credit unions and insurance firms. PRA will keep the proposed approach and policy under review to assess whether any adjustments are required, including in light of the planned introduction of the Net Stable Funding Ratio (NSFR) standard. PRA will monitor the quality of information provided by firms in their ILAAP documents, recovery plans and, for applicable firms, as part of their assessments of their preparations for resolution, to ensure it is sufficient to meet the expectations set out in these proposals. The proposals have been designed in the context of the current UK and EU regulatory framework. If UK leaves EU with no implementation period in place, PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018.

     

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    Comment Due Date: January 17, 2020

    Keywords: Europe, UK, Banking, Asset Encumbrance, Recovery Planning, Resolution, Resolution, ILAAP, NSFR, CP 24/19, PRA

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