PRA Updates Policy for Managing Prudential Risks on Asset Encumbrance
PRA published the policy statement PS18/20 on asset encumbrance with respect to the Capital Requirements Directive (CRD) IV. PS18/20 contains the updated versions of the supervisory statements SS9/17 on recovery planning, SS24/15 on the approach to supervising liquidity and funding risks, and SS20/15 on supervising treasury and lending activities of building societies. PS18/20 also provides feedback to responses to the consultation paper CP24/19 on managing the key prudential risks associated with asset encumbrance. The policy presented in PS18/20 will become effective from the date of publication. PS18/20 is relevant to all PRA-regulated firms, except credit unions and insurance firms.
CP24/19 had set out 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 firms’ 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 the Internal Liquidity Adequacy Assessment Process documents and recovery plans. Based on the responses received to the consultation paper, PRA has made the following changes to the draft policy in SS20/15 to reflect that
- Market counterparties does not refer to central banks (paragraph 4.163)
- PRA will expect that building societies have an "appropriate" forward view of collateral available, not a "comprehensive" one (paragraph 4.91)
PRA considers that these changes are not significant and remove the potential for ambiguity. The changes in SS24/15 reflect the expectations of PRA on how firms should manage risks associated with asset encumbrance for the purpose of their resilience to liquidity stress and of the stability of their funding profile. Footnote numbers have also been updated throughout in SS24/15. Among other changes, paragraph 3.5 has an additional footnote and includes developments over time. Consequently, footnote numbers have also been updated. The changes in SS9/17 update the PRA expectations to include how firms should consider risks associated with asset encumbrance for their recovery planning. Minor formatting changes have also been made to SS9/17 to improve readability, including removing blank pages and footnote numbering.
The policy set out in PS18/20 has been designed in the context of the withdrawal of UK from EU and entry into the transition period, during which time the UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with EU take effect. PRA has assessed that this policy would not need to be amended under the EU (Withdrawal) Act 2018.
Related Links
Effective Date: Juy 27, 2020
Keywords: Europe, UK, Banking, Asset Encumbrance, Recovery Planning, ILAAP, CP24/19, PS18/20, SS24/15, SS9/17, SS20/15, Liquidity Risk, CRD IV, PRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
FASB Proposes Taxonomy Improvements to Accounting Under Topic 944Related Articles
PRA Consults on Implementation of Certain Provisions of CRD5
PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).
EIOPA Report Identifies Key Financial Stability Risks for Insurers
EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA Publishes Risk Dashboard for First Quarter of 2020
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
EBA Issues Updates on Stress Test Exercise for Banks in EU
EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.
PRA Proposes Guidance Related to Matching Adjustment under Solvency II
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
MAS Issues Guidance on Dividend Distributions by Banks
MAS published a statement guidance on dividend distribution by banks.
APRA Updates Guidance on Capital Management for Banks
APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.
FSB Report Reviews Macro-Prudential Framework and Tools in Germany
FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.
EBA Urges Firms to Finalize Preparations for End of Brexit Transition
EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
SRB on Operational Continuity in Resolution and FMI Contingency Plans
SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.
