Large exposures: Reciprocation of French measure - PS24/19
This Prudential Regulation Authority (PRA) Policy Statement (PS) provides the PRA’s final rule (see Appendix) following Consultation Paper (CP) 15/19 ‘Large exposures: Reciprocation of French measure’ (see page 2 of 2). The PRA received no responses to the consultation.
The measure described in this PS applies on a consolidated basis to firms identified by the PRA as global systemically important institutions (G-SIIs) and other systemically important institutions (O-SIIs), under the Capital Requirements Directive (2013/36/EU) (CRD) as implemented in the Capital Requirements (Capital Buffers and Macro-prudential measures) Regulations 2014. This PS is therefore relevant to such firms and their subsidiaries.
In CP15/19 the PRA proposed to tighten the large exposure limit in CRR Article 395(1) to 5% of eligible capital, in respect of the exposures of UK G-SIIs and O-SIIs to French non financial corporations meeting the definition of ‘highly indebted’.* This reciprocates the same measure imposed by the Haut Conseil de stabilité financière (HCSF) in France in July 2018.
The PRA has made one minor change to the draft rule-making instrument (Rule 5.1) to remove possible ambiguity on the scope of application. The PRA considers this will have no impact on firms, and specifically, mutuals.
The policy presented in this PS will take effect on Wednesday 1 January 2020.
The policy set out in this PS has been designed in the context of the current UK and EU regulatory framework. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework, including those arising once any new arrangements with the European Union take effect.
In the event that the UK leaves the EU with no implementation period in place, the PRA has assessed that the rule attached to this PS would need to be amended under the EU (Withdrawal) Act 2018 (EUWA). Please see PS5/19 ‘The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018’ for further details.
The final rules attached to this PS do not contain the relevant amendments under the EUWA consulted on in CP15/19. The relevant changes under EUWA will be made separately prior to exit day.
As the policy relates to reporting it should be read in conjunction with SS2/19 ‘PRA approach to interpreting reporting and disclosure requirements and regulatory transactions forms after the UK’s withdrawal from the EU’.
Large exposures: Reciprocation of French measure - CP15/19
In this consultation paper (CP), the Prudential Regulation Authority (PRA) sets out its proposal to apply a tighter limit for large exposures (LE) to certain French non-financial corporations (NFCs), to reciprocate the same measure imposed by France. The proposal would be effected through amendments to the Large Exposures Part of the PRA Rulebook (see Appendix 1).
The proposed measure applies on a consolidated basis to firms identified by the PRA as global systemically important institutions (G-SIIs) and other systemically important institutions (O-SIIs), under the Capital Requirements Directive (2013/36/EU) (CRD) as implemented in the Capital Requirements (Capital Buffers and Macro-prudential measures) Regulations 2014. This CP is therefore relevant to such firms and their subsidiaries.
The European Systemic Risk Board (ESRB) has recommended European Economic Area (EEA)-wide reciprocation of a macroprudential measure imposed by the Haut Conseil de stabilité financière (HCSF) in France in July 2018 under CRR Article 458 (‘the HCSF measure’).
The HCSF measure lowers the LE limit for French G-SIIs and French O-SIIs in respect of their exposures to French NFCs that are ‘highly indebted’. ‘Highly-indebted’ is defined as having both a leverage ratio greater than 100%, and a ratio of earnings before interest and taxation to interest payment of below three, calculated at the highest level of group consolidation.
The new limit for these exposures is 5% of the institution’s eligible capital. This compares to the general LE limit, specified under Article 395(1) of the Capital Requirements Regulation (575/2013/EU) (CRR), of 25% of an institution’s eligible capital.
HM Treasury have decided to reciprocate this measure under Article 458(5) of the CRR, and have asked the PRA to implement a measure in the UK consistent with that decision.
The Financial Policy Committee (FPC) considered the ESRB Recommendation to reciprocate the measure in July 2019. It noted in its Record of that meeting that “Reciprocation would be in line with the FPC’s previously stated intention of reciprocating foreign non-CCyB macroprudential capital actions where appropriate, recognising both the likely benefits to UK financial stability and to maintain consistency with its approach to reciprocating foreign CCyB rates” and that “while currently no UK banks met the materiality threshold set out by the ESRB, banks could do so in the future due to ordinary fluctuations of business. Reciprocation would ensure compliance with the ESRB regime. The FPC noted the measure, through targeting corporate indebtedness, was related to leveraged lending. The FPC had previously identified the rapid growth of leveraged lending globally as a risk to UK financial stability.”
The proposal in this CP is intended to ensure the UK’s compliance with the ESRB Recommendation and to comply with the request from HM Treasury.
The planned implementation date for the proposal in this CP is 1 January 2020.
Responses and next steps
This consultation closed on Friday 6 September 2019. The PRA invites feedback on the proposal set out in this consultation. Please address any comments or enquiries to CP15_19@bankofengland.co.uk.
The proposal set out in this CP have been designed in the context of the current UK and EU regulatory framework. The PRA has assessed that the proposal will be affected in the event that the UK leaves the EU with no implementation period in place.
A second version of the proposed amendments to the PRA Rulebook rules, which includes the relevant changes relating to the UK’s withdrawal from the EU, is set out in Appendix 2.