Statement on the regulatory treatment of the UK Coronavirus Business Interruption Loan Scheme (CBILS) and the UK Coronavirus Large Business Interruption Loan Scheme (CLBILS)

PRA statement in response to HM Treasury’s announced changes to UK Coronavirus (Covid-19) business interruption loan schemes
Published on 27 April 2020

Update 26 June 2020: We published an update to include clarifications on the application of credit risk approaches for firms. 

Application of credit risk approaches

Clarification for firms using the standardised approach for exposures to the obligor

The portion of an exposure benefiting from the protection of a guarantee provided by the Secretary of State under the schemes is assigned the relevant sovereign risk weight prescribed by the standardised approach (the amount of guarantee recognised should be adjusted under relevant CRM provisions for any payment types excluded under the guarantees). The residual part of the exposure – that is the portion that does not benefit from the protection of a guarantee provided under these schemes – is assigned the standardised approach risk weight that would apply if the exposure were not guaranteed.

Clarification for firms using the IRB approach for exposures to the obligor and the standardised approach for exposures to the guarantor (under permanent partial use or rollout)

The portion of an exposure benefiting from the protection of a guarantee provided by the Secretary of State under the schemes is assigned the relevant sovereign risk weight prescribed by the standardised approach (the amount of guarantee recognised should be adjusted under relevant CRM provisions for any payment types excluded under the guarantees). The residual part of the exposure – that is the portion that does not benefit from the protection of a guarantee provided under these schemes – is risk weighted according to the relevant approved IRB approach as if the exposure were not guaranteed.

Clarification for firms using the IRB approach for exposures to the obligor and the IRB approach for exposures to the guarantor

Firms should adopt an approach to reflect the effect of the guarantee provided by the Secretary of State that is consistent with their approved IRB models and their IRB permissions.

 

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. 

 
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