PRA Consults on Management of Prudential Risks on Asset Encumbrance
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.
Related Links
Comment Due Date: January 17, 2020
Keywords: Europe, UK, Banking, Asset Encumbrance, Recovery Planning, Resolution, Resolution, ILAAP, NSFR, CP 24/19, PRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Karen Moss
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
Previous Article
QFCRA Amends Business Prudential Rules Related to Leverage RatioRelated Articles
PRA and FPC Finalize Changes to Leverage Ratio Framework in UK
The Prudential Regulation Authority (PRA) published the final policy statement PS21/21 on the leverage ratio framework in the UK. PS21/21, which sets out the final policy of both the Financial Policy Committee (FPC) and PRA
CFPB Proposes Rule on Small Business Lending Data Collection
The Consumer Financial Protection Bureau (CFPB) proposed to amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) under Section 1071 of the Dodd-Frank Act.
PRA Decides to Maintain O-SII Buffers for Another Year
The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023.
FSB Report Assesses Implementation of Recommendations on Stablecoins
The Financial Stability Board (FSB) published a progress report on implementation of its high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.
APRA Updates Loan Serviceability Expectations for Home Lending
In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
CPMI and IOSCO Consult on Guidance on Stablecoin Arrangements
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are consulting on the preliminary guidance that clarifies that stablecoin arrangements should observe international standards for payment, clearing, and settlement systems.
EBA and EIOPA Set Out Work Priorities for 2022
The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) have set out their respective work priorities for 2022.
MFSA Issues Reporting Updates and Guidance for Banks
The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0, in addition to the reporting module on leverage under the common reporting (COREP) framework.
EC Publishes Decision on List of Equivalent Third Countries Under CRR
The European Commission (EC) published the Implementing Decision 2021/1753 on the equivalence of supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures, in accordance with the Capital Requirements Regulation or CRR (575/2013).
EC Rule on Contractual Recognition of Write-Down and Conversion Powers
EC published the Implementing Regulation 2021/1751, which lays down implementing technical standards on uniform formats and templates for notification of determination of the impracticability of including contractual recognition of write-down and conversion powers.
