PRA Issues Statement on NPEs and Policy on Trading Activity Wind-Down
The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures. Also published were a policy statement PS4/22 on trading activity wind-down, along with an associated updated supervisory statement on recovery planning, both of which become effective from March 03, 2025.
Statement on EBA guidelines
The statement sets out the PRA approach to EBA guidelines on the management of non-performing and forborne exposures. PRA published this statement in light of the feedback from firms that the status of the guidelines in the UK is currently uncertain. PRA acknowledges that the prudential aspects of these guidelines broadly represent good credit risk management standards. However, PRA notes that these guidelines are not applicable to or in the UK, specifically in the following aspects:
- The guidelines apply detailed requirements for firms with a gross non-performing exposure ratio of at least 5%. PRA has not adopted the 5% threshold and the associated additional obligations when a firm exceeds this threshold.
- The guidelines require competent authorities to define a common threshold for the individual valuation and revaluation of the collaterals used for non-performing exposures. PRA has not set a common threshold and the approach to valuation and revaluation is at the discretion of individual firms.
PS4/22 on trading activity wind-down
The policy statement PS4/22 contains the supervisory statement SS1/22 on trading activity wind-down (Appendix 1), Statement of Policy (SoP) on trading activity wind-down (Appendix 2), updated supervisory statement SS9/17 on recovery planning’ (Appendix 3), and feedback to the responses received to the consultation paper CP20/21 on trading activity wind-down. SS1/22, the Statement of Policy, and the updated SS9/17 will be effective from March 03, 2025. References related to the UK’s membership of the European Union (EU) have been updated to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law. After considering responses received to the consultation in CP20/21, PRA has made some minor drafting amendments to SS1/22, SS9/17, and the trading activity wind-down Statement of Policy to improve readability, in addition to the following changes to the final policy in SS1/22:
- Chapter 4 (paragraphs 4.27, 4.39-4.40): PRA provided further clarification on the projection of risk-based losses.
- Chapter 5 (paragraphs 5.1, 5.3-5.4): PRA renamed the non-mandatory templates as the Trading Wind-Down (TWD) templates and clarifies its expectations for the trading wind-down firms that intend to adopt their own format of TWD templates.
- Chapter 6 (paragraph 6.8): Additional details were provided for trading wind-down firms that are part of third-country groups concerning their compliance with recovery and resolution requirements.
PS4/22 is relevant to, although may not apply directly, to all PRA-authorized UK banks, their qualifying parent undertakings and PRA-designated investment firms that are engaged in trading activities, and relevant third-country branches. It is also relevant to policymakers and practitioners that would expect to be involved in a firm’s resolution. It is not relevant to credit unions. PRA supervisors will engage with the trading wind-down firms until the policy expectations come into force, will want to understand that firms are making adequate preparations significantly in advance of the implementation date, and will want to oversee progress to implementation. Firms should expect this dialog to commence in the second half of 2022, with the exact timing to be confirmed by PRA supervisors. The supervisory statement SS9/17 on recovery planning complements and should be read in conjunction with the Recovery Planning Part of the PRA Rulebook, the Commission Delegated Regulation (EU) 2016/1075, EBA guidelines on the range of scenarios to be used in recovery plans, EBA guidelines on the minimum list of qualitative and quantitative recovery plan indicators, and EBA recommendation on the coverage of entities in a group recovery plan.
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Keywords: Europe, UK, Banking, Trading Activity Wind Down, Resolution Framework, Investment Firms, Resolvability Assessment Framework, CP 20/21, SS 1/22, PS 4/22, SS 9/17, Recovery Planning, EBA, Guidelines, NPE, Nonperforming Exposures, Forborne Exposures, NPLS, Credit Risk, Basel, PRA, Headline
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