Credit risk mitigation: Eligibility of guarantees as unfunded credit protection

Policy Statement 8/19 | Consultation Paper 6/18

Published on 13 March 2019

Credit risk mitigation: Eligibility of guarantees as unfunded credit protection - PS8/19

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 6/18 ‘Credit risk mitigation: Eligibility of guarantees as unfunded credit protection’ (see page 2 of 2). It also contains the PRA’s final policy in updated:

  • Supervisory Statement (SS) 17/13 ‘Credit risk mitigation’ (Appendix 1); and
  • SS31/15 ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)’ (Appendix 2).

This PS is relevant to all firms bound by the Capital Requirements Regulation (575/2013) (CRR).

Changes to draft policy

The PRA received 31 responses to the CP. Respondents generally welcomed the PRA’s clarification of its expectations regarding the eligibility of guarantees as credit risk mitigation. However, several respondents raised concerns regarding the impact of the proposals on certain types of guarantees. Several respondents also requested further clarification on certain aspects of the proposals.

Following consideration of responses, the PRA has made three significant changes to the proposals consulted on in the CP. These changes are as follows:

  • the removal of the proposal relating to the meaning of pay out in a timely manner;
  • a new expectation around risks arising from eligible guarantee arrangements; and 
  • a new expectation around recognising any residual risks.

Further details on these changes, along with a cost benefit analysis, and assessment of impact on mutuals, are set out in Chapter 2 of the PS.

The PRA has made other changes to the draft policy which, in the opinion of the PRA, are not significant. This includes minor changes to the proposal on legal effectiveness and enforceability of qualifying guarantees, and to the proposal around qualifying guarantees being clearly defined and incontrovertible. Further details on these changes are set out in Chapter 2. The PRA does not consider the impact is significant, or significantly different, for mutuals. Therefore, the assessment of impact on mutuals and the cost benefit analysis in respect of these changes has not been updated.

Implementation

The changes to SS17/13 and SS31/15 will be effective six months from the publication of this policy, ie from Friday 13 September 2019.

PDFPolicy Statement 8/19


Published on 16 February 2018

Credit risk mitigation: Eligibility of guarantees as unfunded credit protection - CP6/18

Background

This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA’s) proposed changes to Supervisory Statement (SS) 17/13 ’Credit risk mitigation’ to clarify expectations regarding the eligibility of guarantees as unfunded credit protection under Part Three, Title II, Chapter 4 (Credit risk mitigation) of the Capital Requirements Regulation (575/2013) (CRR). 

The proposals extend to any contract or other documented obligation that purports to be a guarantee for the purpose of achieving unfunded credit protection under CRR Part Three, Title II, Chapter 4.

The CP is relevant to all firms bound by the CRR.

Summary of proposals

CRR Part Three, Title II, Chapter 4 (Credit risk mitigation) sets out the criteria that a guarantee must meet to be eligible for credit risk mitigation. The CP proposes amendments to SS17/13 to provide guidance on the eligibility criteria for the recognition of guarantees.

Responses and next steps

This consultation closed on Wednesday 16 May 2018. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP6_18@bankofengland.co.uk.

PDFConsultation Paper 6/18

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