PS14/23 – The non-performing exposures capital deduction

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to consultation paper (CP) 6/23 – The non-performing exposures capital deduction. It also contains the PRA’s final policy, in the form of amendments to the following Parts of the PRA Rulebook:

• Own Funds and Eligible Liabilities (CRR) Part;
• Disclosure (CRR) Part;
• Regulatory Reporting Part; and
• Reporting (CRR) Part.

1.2 This PS is relevant to banks, building societies, PRA-designated investment firms and PRA-approved, or PRA-designated, financial, or mixed financial holding companies.

Background

1.3 In CP6/23, the PRA proposed to remove the CET1 deduction requirement for non-performing exposures (NPEs) that are treated as insufficiently covered by firms’ accounting provisions and related reporting requirements for CRR firms. In particular, the PRA proposed to:

• remove the NPE deduction requirement by deleting CRR Article 36(1)(m) from Chapter 3 of the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook; and
• amend the associated reporting templates under the relevant appendices in Chapters 5 and 6 of the Reporting (CRR) Part and Regulatory Reporting Part of the PRA Rulebook that provide information specifically on the NPE deduction requirements.

Summary of responses

1.4 The PRA received three responses to the CP. Respondents welcomed the proposals but suggested other changes to PRA rules and the UK CRR which are set out in Chapter 2 of this PS. The PRA has made three additional changes to the associated reporting and disclosure instructions to remove references to the deleted NPE deduction article.

Changes to draft policy

1.5 Where the final rules differ from the draft in the CP in a way that is, in the PRA’s opinion, significant, the Financial Services and Markets Act 2000 (FSMA)^{footnote [1]} requires the PRA to publish:

• details of the difference together with a cost benefit analysis; and
• a statement setting out in the PRA’s opinion whether or not the impact of the final rule on mutuals is significantly different to the impact that the draft rule would have had on mutuals, or the impact that the final rule will have on other PRA-authorised firms.

1.6 After considering the responses, the PRA has made additional changes to reporting and disclosure instructions. The changes include amendments to the reporting instructions in Annex II of the Reporting (CRR) Part of the PRA Rulebook and the Pillar 3 disclosure instructions for templates CR4 and CR5 under Annex XX of the Disclosure (CRR) Part of the PRA Rulebook.

1.7 The PRA considers that the changes to these templates and instructions are not significant and that the cost benefit analysis presented in CP6/23 remains valid for the final rules. The PRA does not consider that the impact of the final rules will have a significantly different impact on mutuals relative to the impact of the draft rules on mutuals, or the impact of the final rules on other PRA-authorised firms.

1.8 When making rules, the PRA is required to comply with several legal obligations, including considering responses to the consultation and publishing an explanation of the PRA’s reasons for believing that making the proposed rules is compatible with its objectives and with its duty to have regard to the regulatory principles.^{footnote [2]} In addition, when making CRR rules or rules applying to certain holding companies, the PRA must consider certain additional matters, and publish an explanation of the ways in which that consideration has affected the proposed rules.^{footnote [3]}

1.9 The PRA sets out these explanations in Chapter 2 of CP6/23. The PRA considers that these explanations remain appropriate after taking into account the responses to the consultation and the changes made to the draft policy. The respondents to the consultation supported the proposals and the PRA considers that the PRA statutory objectives and ‘have regards’ analysis in CP6/23 remains appropriate.

1.10 The PRA must also publish a summary of the purpose of the proposed rules.^{footnote [4]} The rules revoke Article 36(1)(m) in the Own Funds and Eligibilities (CRR) Part of the PRA Rulebook, which requires firms to deduct from CET1 capital the applicable amount of insufficient coverage for non-performing exposures. They also revoke references to that deduction requirement in the Disclosure (CRR) Part, Regulatory Reporting Part, and Reporting (CRR) Part of the PRA Rulebook.

Implementation and next steps

1.11 The rule change to remove the NPE deduction requirement will come into effect on 14 November 2023. The necessary modifications to reporting requirements will also be effective from that date.

1.12 Once the amended rules become effective, firms will no longer be required to complete the associated reporting templates. The PRA intends to make any required changes to existing reporting templates and taxonomy at a later date.

1.13 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.^{footnote [5]}

2: Feedback to responses

2.1 Before making any proposed rules, the PRA is required by FSMA to have regard to any representations made to it, and to publish an account, in general terms, of those representations and its feedback to them.^{footnote [6]}

2.2 The PRA has considered the responses received to the CP. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

2.3 In CP6/23, the PRA proposed to remove the NPE deduction requirement by deleting Article 36(1)(m) from Chapter 3 of the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook. The PRA also proposed to remove the associated reporting requirements for the NPE deduction.

2.4 The three respondents to the CP supported the proposals and agreed with the rationale. However, some respondents suggested changes to other reporting and disclosure requirements in the PRA Rulebook regarding NPEs. The comments covered references to the NPE deduction rule within the associated reporting and disclosure instructions, references in the UK CRR, and also more general NPE reporting obligations. The PRA’s response to these issues is set out below.

2.5 One respondent highlighted that the PRA did not consult on deleting a reference to Article(36)(1)(m) in the PRA’s instructions for COREP reporting on value adjustments and provisions. Two respondents also noted that the PRA did not consult on two additional references to the deleted rule in the instructions for Pillar 3 disclosure templates for certain credit risk exposures. The respondents suggested that the PRA remove references to the NPE deduction requirement from these reporting and disclosure instructions.

2.6 The PRA agrees with these suggested changes and will make three changes as a result of these responses. The first change removes references to the NPE deduction requirement in the COREP reporting instruction in Annex II, Rule 6.57 of the Reporting (CRR) Part of the PRA Rulebook.^{footnote [7]} The other two changes amend Pillar 3 disclosure instructions^{footnote [8]} to remove references to the NPE deduction requirement by:

• removing references to CRR Article 36(1)(m) in the Pillar 3 disclosure Template UK CR4; and
• removing references to CRR Article 36(1)(m) in the Pillar 3 disclosure Template UK CR5.

2.7 One respondent suggested that references to the NPE deduction rule be removed from certain articles in the UK CRR.^{footnote [9]}

2.8 The CRR articles to which this respondent referred to remain part of retained EU legislation, which the PRA does not have the power to amend. The PRA will consider updating these provisions in the course of transferring retained EU legislation to the PRA Rulebook.

2.9 Two respondents suggested that the PRA should consider removing other FINREP reporting^{footnote [10]} and Pillar 3 disclosure^{footnote [11]} obligations relating to NPEs. These are reporting requirements for additional information on loans, flows of NPEs, collateral obtained, forbearance management, and duration and recovery period of NPEs. The disclosure templates provide information on the firm’s exposure to credit risk, dilution risk, and credit quality.

2.10 Although they are related to NPEs, these reporting and disclosure requirements relate to matters that fall outside the scope of the consultation. At this stage, the PRA does not propose to make any changes to these obligations; however, they may be reviewed at a later date.