PRA published the consultation paper CP10/21 on the capital treatment of nonperforming exposure securitizations by the Capital Requirements Directive (CRD) firms. PRA proposed to define non-performing exposure securitizations, and changes to the associated capital treatment. The proposal in this consultation would result in the addition of a new Non-Performing Exposure Securitization Part of the PRA Rulebook (Appendix 1) and amendments to the supervisory statement SS10/18 on general requirements and capital framework for securitizations (Appendix 2). The consultation closes on July 26, 2021 and the proposed implementation date for the final policy is January 01, 2022.
A revised securitization capital framework was implemented via the Capital Requirements Regulation (CRR) and the policy statement PS29/18 on general requirements and capital framework for securitizations to tackle shortcomings in the framework, as observed during the global financial crisis. However, the Basel standards did not provide any specific treatment for securitizations of nonperforming loans. To address this gap, in the fourth quarter of 2020, BCBS published a technical amendment with a bespoke treatment for nonperforming loan securitizations. The BCBS amendment is for implementation no later than January 2023. The proposals in CP10/21 aim to implement this amendment in the UK. PRA has proposed to implement a fixed risk-weight of 100% for senior tranches of qualifying nonperforming exposure securitizations where firms use the securitization internal ratings-based approach (SEC-IRBA) and the securitization standardized approach (SEC-SA). PRA also proposed to implement a 100% risk-weight floor for all tranches of nonperforming exposure securitizations, unless the firm uses the securitization external ratings based approach (SEC-ERBA), where PRA does not propose to implement a risk-weight floor.
The proposals also include definitions for non-performing exposure securitizations and qualifying non-performing exposure securitizations, along with a new expectation with regard to nonperforming exposure securitizations. PRA proposes to use the existing CRR definition of a nonperforming exposure to define the underlying assets eligible for a nonperforming exposure securitization. PRA considers that the use of this single definition across the capital framework (which is already familiar to firms) would ensure that its rules remain transparent and proportional. PRA proposes to define a nonperforming exposure securitization as a securitization backed by a pool of nonperforming exposures that make up, at minimum, 90% of the entire pool’s nominal value at origination and at any later stage when assets are added or removed from the underlying pool. PRA proposes to define a qualifying nonperforming exposure securitization as a traditional nonperforming exposure securitization, where non-refundable purchase price discount (NRPPD) is at least 50% of the outstanding amount of the underlying exposure at the time they were transferred to the securitization special purpose entity. PRA also proposes to update SS10/18 to include an expectation that a firm’s senior management function should satisfy themselves that performing loans are not being included in a nonperforming exposure securitization for the purpose of reducing the capital charge on such loans.
The proposals in this consultation would take effect in conjunction with any consequential amendment to the CRR by HM Treasury. PRA has consulted with FCA on the proposals in this consultation and responses to this consultation will be shared with FCA, where they affect FCA objectives. The proposals have been designed in the context of the end of Brexit transition and any references to EU or EU-derived legislation refer to the version of that legislation that forms part of the retained EU law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework.
Comment Due Date: July 26, 2021
Keywords: Europe, UK, Banking, Basel, Credit Risk, Non-Performing Loans, CP10/21, PRA Rulebook, SS 10/18, NPLs, Securitization Framework, Regulatory Capital, BCBS, PRA
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