HM Treasury has today announced changes to UK Covid-19 business interruption loan schemes.
This statement complements the government’s announcement, and sets out the PRA’s observations on whether the guarantees provided by the Secretary of State for Business, Energy and Industrial Strategy under the CBILS and CLBILS (‘the schemes’), are eligible for recognition as unfunded credit risk mitigation (CRM) under the Capital Requirement Regulation (‘the CRR’).1
This statement does not provide an exhaustive description of the prudential requirements that apply to loans extended by participating banks to businesses under the schemes, nor is it a comprehensive description of the regime under which CRM techniques impact the calculation of risk-weighted exposure amounts. Firms are encouraged to review relevant articles of the CRR, and any relevant PRA rules and guidance (including expectations set out in the PRA’s Supervisory Statement on credit risk mitigation – SS17/13 ‘Credit risk mitigation’). Where necessary, firms should seek independent advice to confirm that all the applicable requirements and expectations have been satisfied.
In the current extraordinary circumstances, it will be challenging for many businesses to provide forecast financial information with a high degree of confidence to support firms’ loan underwriting processes. Given that, we expect lenders to use their judgement on what information is required to make credit decisions. Lenders are reminded that they should consider the range of information available to them including (but not limited to): the performance of the business prior to the Covid-19 outbreak; a view of how the loan will be repaid in due course, relying on judgement in the absence of financial forecast information; and the general prospects for the sector in which the business operates once the effects of the pandemic have receded.
CRM eligibility of the schemes
A guarantee is one form of unfunded credit protection which, where it meets the conditions in Articles 194 and 213-215 CRR, may allow a firm to adjust risk weights and expected loss amounts.
The CBILS and CLBILS guarantees have been provided by the Secretary of State in the context of the Covid-19 pandemic.
The PRA considers that the terms of the guarantees provided by the Secretary of State under the schemes do not contain features that would render these guarantees ineligible for recognition as unfunded credit risk protection, and the effects of these guarantees would appear to justify such treatment.
Additional observations on CBILS scope of protection
Some of the CBILS guarantees exclude cover for interest and fees. In accordance with the CRR, firms recognising the CBILS guarantee as eligible unfunded protection in relation to an exposure are required to adjust the exposure amount to exclude elements not covered by the CBILS guarantee.
1 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms.