The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021. In this context, BoE published a statement that sets out the PRA observations on whether the guarantees provided by the Secretary of State for Business, Energy, and Industrial Strategy under the RLS are eligible for recognition as unfunded credit risk mitigation under the UK Capital Requirements Regulation or CRR. The Recovery Loan Scheme is intended to help businesses of any size access loans and other kinds of finance to support recovery from the pandemic. Under this scheme, which is open until December 31, 2021, the government guarantees 80% of finance to the lender.
The BoE statement does not provide an exhaustive description of the prudential requirements that apply to loans extended by participating banks to businesses under the RLS, nor is it a comprehensive description of the regime under which the credit risk mitigation techniques impact the calculation of risk-weighted exposure amounts. Firms are encouraged to review the relevant articles of CRR, along with any relevant PRA rules and guidance (including expectations set out in the PRA supervisory statement SS17/13 on credit risk mitigation). A guarantee is one form of unfunded credit protection which, where it meets the conditions in Articles 194 and 213-215 of CRR, may allow a firm to adjust risk-weights and expected loss amounts. Under the terms of the guarantee, the Secretary of State may set a limit on the aggregate number of claims that a lender can make for a future "Scheme Period" in respect of an RLS facility.
PRA considers that for "Scheme Periods" where the "Claim Limit" is set at not less than 100%, the terms of the guarantee provided by the Secretary of State under the RLS do not contain features that would render the guarantee ineligible for recognition as unfunded credit risk protection and the effects of the guarantee would appear to justify such treatment. Were the Claim Limit to be set lower for subsequent Scheme Periods, this guidance would not apply and the effect of the guarantee on regulatory capital requirements would need to be carefully assessed against the law and guidance applicable at the time. The statement also highlights that, in accordance with CRR, firms recognizing the RLS guarantee as eligible unfunded protection in relation to an exposure are required to adjust the exposure amount to exclude elements not covered by the RLS guarantee.
RLS will ensure businesses continue to benefit from the government-guaranteed finance throughout 2021. The scheme will be administered by the British Business Bank, with loans available through a diverse network of accredited commercial lenders. Twenty-six lenders have already been accredited for day one of the scheme, with more to come shortly. Interest rates have been capped at 14.99% and are expected to be much lower than that in the vast majority of cases. RLS can be used as an additional loan on top of the support received from the emergency schemes, such as the Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS), that were put into place last year. Although up to GBP 10 million is available per business, the actual amount offered and the terms will be at the discretion of participating lenders.
- HM Treasury on RLS
- HM Treasury Announcement
- BoE Statement on RLS
- PRA Statement on Credit Risk Mitigation
Keywords: Europe, UK, Banking, Recovery Loan Scheme, COVID-19, CRR, Credit Risk, RLS, Regulatory Capital, Basel, Risk-Weighted Assets, HM Treasury, PRA, BoE
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