PRA published a statement that sets out its views on certain amendments made to Capital Requirements Regulations (CRR and CRR2) via EU Regulation 2020/873 (CRR "Quick Fix"), including some guidance for firms. The CRR "Quick Fix" which was published in response to COVID-19 pandemic is applicable since June 27, 2020. In accordance with the European Union (Withdrawal Agreement) Act, the CRR "Quick Fix" applies directly to PRA-regulated firms. This PRA statement sets out its initial views on the measures included in the "Quick Fix" package. These measures include transitional arrangement for capital impact of IFRS 9 Expected Credit Loss (ECL) accounting, acceleration of certain CRR2 measures, and a temporary prudential filter on certain unrealized gains and losses.
Transitional arrangements for capital impact of IFRS 9 ECL accounting
The CRR "Quick Fix" introduces new transitional arrangements for the capital impact of IFRS 9 ECL provisions. It implements the measures announced by BCBS in April 2020, with respect to the ECL accounting to alleviate the impact of COVID-19. The intention of PRA remains that, subject to the need for sufficient resilience at the end of the transitional period, all aspects of supervision of a firm using the transitional arrangements would be carried out using transitional data on capital resources and not "fully loaded" figures. In particular, as stress tests should reflect how stress would be experienced, those tests should fully take account of the revised transitional arrangements.
Firms already applying the CRR transitional arrangements for IFRS 9 will need to implement the revised calculations set out in the CRR "Quick Fix," including amending the common equity tier 1 (CET1) add-back factors applied to relevant ECL provisions for 2020-24. Firms applying the transitional arrangements that are considering ceasing to apply them should note that, under the CRR, doing so would require the permission of PRA. If a firm wishes to apply for PRA permission no longer to apply the transitional arrangements, the firm is encouraged to contact its PRA supervisor with a request by July 31, 2020. The firm needs to include a written explanation of the basis on which its management body has satisfied itself of the continuing adequacy of the firm’s financial resources, including in stressed scenarios. Its supervisor will discuss the matter with it in the context of supervision of the firm’s resilience and capital adequacy.
Acceleration of Certain CRR2 measures and temporary prudential filter on certain unrealized gains and losses
The CRR "Quick Fix" accelerates the date of application of certain CRR2 measures that had been due to apply from June 28, 2021. These include the revised small and medium-size enterprises (SME) support factor, infrastructure support factor, and non-deduction of certain software assets from CET1 capital. The CRR "Quick Fix" also applies the revised treatment of software assets from the date on which EBA regulatory standards that will specify their prudential treatment enter into force. The CRR "Quick Fix" also includes a temporary discretion for firms until December 31, 2022 to remove a proportion of unrealized gains and losses on exposures to certain public sector authorities. These measures do not derive from BCBS agreements and are specific to the CRR. At present, PRA does not have adequate information on the quantitative impact of these measures. PRA intends to request data to facilitate quantitative analysis of the impact of these CRR "Quick Fix" measures. Analysis of those data, along with the final regulatory technical standards of EBA on software assets, will inform the PRA supervisory approach, including an assessment of whether further action is necessary under Pillar 2.
Keywords: Europe, UK, Banking, COVID-19, Basel, CRR, CRR2, IFRS 9, ECL, CET 1, Pillar 2, Withdrawal Agreement, Transitional Arrangements, PRA
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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