PS14/25 – Amendments to the Large Exposures Framework – Part 1

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses the PRA received to Chapter 5 of consultation paper (CP) 14/24 – Large Exposures Framework. This PS also provides feedback to responses received on groups of connected clients (GCC) in relation to Chapter 4 of CP23/23 – Identification and management of step-in risk, shadow banking entities and groups of connected clients.

1.3 This PS contains the PRA’s final policy, as follows:

• amendments to the Large Exposures (CRR) Part of the PRA Rulebook (Appendix 1);
• amendments to the Large Exposures Part of the PRA Rulebook (Appendix 1);
• amendments to Annex IX – Instructions for reporting on large exposures and concentration risk (Appendix 2); and
• the addition of a new SS on ‘Identification of groups of connected clients for large exposures purposes’ (Appendix 3).

1.3 The PRA expects to finalise the remaining proposals in CP14/24 in 2026. This includes:

• Chapter 2: Calculation of Exposure Values – Securities Financing Transactions;
• Chapter 3: Limits to Large Exposures – Trading Book Exposures; and
• Chapter 4: Calculating the effect of the use of credit risk mitigation techniques.

1.4 CP23/23 also contained proposals related to shadow banking entities (SBEs) in Chapter 3. The PRA expects to finalise its policy on SBEs in due course. In the meantime, firms are expected to make every effort to comply with the existing European Banking Authority (EBA) guidelines on limits on exposures to SBEs. The PRA’s final policy on the identification and management of step-in risk in Chapter 2 of CP23/23 was published in PS5/25 – Identification and management of step-in risk.

1.5 This PS is relevant to PRA-authorised UK banks, building societies, PRA-designated investment firms, PRA-approved holding companies, PRA-designated holding companies and other CRR consolidation entities.

Background

1.6 In CP14/24, Chapter 5 – Exceptions, Exemptions and Reciprocation, the PRA proposed to:

• remove the exemption from large exposure limits to firms’ exposures to the UK deposit guarantee scheme (DGS);
• remove the option for firms to use immovable property as credit risk mitigation (CRM); and
• remove the stricter requirements on exposures to certain French counterparties.

1.7 In CP23/23, Chapter 4 - Groups of connected clients, the PRA proposed to:

• transfer the EBA’s guidelines on ‘connected clients’, with some amendments, to PRA Rules and supervisory statements (SS); and
• amend the Large Exposures (CRR) Part to include definitions of ‘group of connected clients’ and ‘control’.

1.8 In determining its policy, the PRA considers representations received in response to consultation, publishing an account of them and the PRA’s response (‘feedback’). Details of any significant changes are also published. In this PS, the ‘Summary of responses’ contains a general account of the representations made in response to the CP and the ‘Feedback to responses’ chapter contains the PRA’s feedback.

1.9 In carrying out its policy making functions, the PRA is required to have regard to various matters. In CP14/24 and CP23/23, the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policies. The ‘Changes to draft policy’ section of this chapter refers to that explanation, taking into account consultation responses where relevant.

Summary of responses

1.10 There were two responses to the proposal to remove the option for firms to use immovable property as CRM. The responses concerned the interaction with the cluster limit proposals consulted on in CP7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs). There was also one response welcoming the proposal to remove stricter large exposure limits for G-SIIs and O-SIIs exposures to highly indebted French non-financial corporates.

1.11 The PRA also received two responses to its proposals on GCC in CP23/23. Respondents broadly agreed with the proposals and requested one technical clarification.

1.12 The names of respondents to the CPs who consented to their names being published are set out at Appendix 5. As well as those who consented, we also received 4 responses from respondents who did not consent to us publishing their names.

Changes to draft policy

1.13 This PS takes account of how the policy advances the PRA objectives and of significant matters that the decision maker had regard to. These are set out in CP14/24 and CP23/23.

1.14 The PRA has amended the final policy as follows:

• Removed changes related to the proposals in Chapters 2, 3 and 4 of CP14/24 from the rule instrument, which will be finalised in due course. This means that we have also retained the Large Exposures Part but removed the stricter requirements on exposures to certain French counterparties as consulted.
• Refined the definition of control.
• Corrected a minor omission and provided clarifications in SS3/25 – Identification of groups of connected clients for large exposures purposes.
• Made various minor technical drafting amendments to the rules to improve legal clarity.

1.15 Where the PRA considers that the final rules differ significantly from the CP, the Financial Services and Markets Act 2000 (FSMA)^{footnote [1]} requires the PRA to publish:

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

1.16 The PRA considers that the cost benefit and ‘have regards’ analysis for this proposal will remain the same as the final rules do not differ significantly from those consulted upon. Similarly, the PRA also does not consider that these changes will have a significantly different impact on mutuals relative to the impact that the draft rules would have had on mutuals, or relative to the impact that the changes would have on other PRA-authorised firms.

1.17 When making rules, the PRA is required to comply with several legal obligations. In CP14/24 and CP23/23, the PRA published its explanation of why the rules proposed by the CP were compatible with its objectives and with its duty to have regard to the regulatory principles.^{footnote [2]} The consideration of the ‘have regards’ has not changed in light of responses to the CP.

1.18 When making CRR rules or rules applying to certain holding companies, the PRA must also publish a summary of the purpose of the proposed rules. This is set out in Chapter 5 of CP14/24 and Chapter 4 of CP23/23.

1.19 Some of the rule changes have necessitated consequential amendments to the PRA’s corresponding provisions table for large exposures (see Appendix 4).

Implementation

1.20 The implementation date for the amended large exposures rules and accompanying policy material is 1 January 2026.

1.21 References related to the UK’s membership of the EU in the SSs covered by the policy in this PS have been updated as part of this PS to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or assimilated legislation refer to the version of that legislation which forms part of assimilated law.^{footnote [3]}

2: Feedback to Responses

Exposures arising from mortgage lending

2.1 In CP14/24, the PRA proposed to remove the option for firms to use immovable property as CRM to reduce exposure values for large exposures purposes. Two respondents commented on the interaction with the PRA’s proposed regime for Small Domestic Deposit Takers (SDDTs). One respondent noted that in CP7/24, the PRA proposed that as part of the review of single-name concentration in the Capital Supervisory Review Process (C-SREP), the PRA would engage with SDDTs for which the sum of their large exposures is above 300% of their Tier 1 capital. The respondent acknowledged that the removal of the option to use immovable property as CRM would not cause a breach of large exposure limits but asked the PRA to consider whether the proposal would require an increase to the 300% trigger. One respondent requested that the PRA either retain the option to use immovable property as CRM or increase the trigger for engagement to 500%.

2.2 The PRA’s decision with respect to the cluster limit proposals will be finalised in a policy statement on the capital regime for SDDTs, which the PRA intends to publish in Q4 2025. The PRA has decided to implement the removal of the option to use immovable property as CRM for large exposures purposes as consulted because it will reduce prudential risk. Immovable property can be illiquid, especially in stress scenarios, and is therefore unlikely to be an effective mitigant in preventing a firm from experiencing financial difficulties or failing due to a counterparty default.

Exempting exposures to the UK deposit guarantee scheme

2.3 In CP14/24, the PRA proposed to remove the option for firms to apply the exemption to remove exposures to the UK’s deposit guarantee scheme from large exposure limits. One respondent noted that the impact of this policy change would be limited. As such, the PRA has implemented the proposal as consulted.

Stricter requirements for exposures of G-SIIs and O-SIIs to certain French counterparties

2.4 The PRA proposed to remove stricter large exposure limits for G-SIIs and O-SIIs exposures to highly indebted French non-financial corporates. One respondent welcomed this proposal. As such, the PRA has implemented the proposal as consulted.

Groups of connected clients (GCCs)

2.5 A prudential framework for large exposures requires firms to identify, manage and control the risk of significant losses that could result from a firm’s large exposures to a single client or GCC. GCCs are entities that constitute a single risk because one of them, directly or indirectly, has control over the others or entities that constitute a single risk as they are so interconnected, if one of them were to experience financial problems, the others would also be likely to encounter financial problems.

2.6 In November 2017, the EBA published guidelines on connected clients. These guidelines specify the approach firms should take when applying the requirement to group two or more clients into a ‘group of connected clients’ because they constitute a single risk.

2.7 In CP23/23, the PRA proposed to transfer the EBA Guidelines on connected clients with some amendments, into a new SS. In addition, in order to improve accessibility, the PRA proposed to include definitions of ‘group of connected clients’ and ‘control’ in the Large Exposures (CRR) Part.

2.8 The PRA received 2 responses to its proposals on GCCs.

2.9 The last sub-paragraph of the definition of a GCC provides firms with an alternative approach when assessing the existence of a GCC where the entities are directly controlled or interconnected with a central government. The alternative approach would allow firms to create two or more separate groups of connected clients for entities directly controlled by or directly interconnected with a central government.

2.10 One respondent suggested that from a level-playing field perspective, it may be worth clarifying that central banks should be viewed as being part of the relevant central government, even if the central bank is independent from the central government. They considered that this will lead to a consistent treatment of all sovereign exposures across all firms.

2.11 Having considered this response, the PRA has decided to maintain the current approach. The PRA considers that firms should make their own judgment when considering whether a central government and a central bank in a particular jurisdiction should be considered a GCC, taking into account the guidelines in the SS.

2.12 The alternative approach also applies to regional governments or local authorities in the UK to which Article 115(2) applies. Two respondents asked if the PRA had any appetite to expand this treatment to regional governments beyond the UK, or to extend it to entities covered in UK CRR Article 115(4), which allows exposures to regional governments in equivalent jurisdictions to be treated as exposures to their central government.

2.13 Having considered these responses, the PRA has decided to maintain the approach consulted on (ie making no changes to the definition of GCC, other than clarifying that the Scottish Government, the Welsh Government and the Northern Ireland Executive shall each be treated as regional governments for large exposures purposes). Further expanding the use of the alternative approach could lead to excessive concentration risks, which would not meet the objectives of the large exposures framework.

2.14 In CP23/23, the PRA proposed to transfer the EBA Guidelines on connected clients into a new SS to set the PRA’s expectations on the approach firms should take to identify GCC based on control. One respondent asked for further guidance on assessing the relationship between entities by including a list of indicators of control to aid consistent application of the definition across firms. Having considered this response, the PRA considers that no further guidance would be needed. This is because the provisions in section 403(1) and 1162 of the Companies Act 2006, referenced in the Rulebook definition of control, provides a definition of control that will allow firms to make case specific judgements.

2.15 One respondent noted that the words ‘...and clients that prepare consolidated financial statements in accordance with the accounting rules of a third country’ were omitted from paragraph 2.3 (b) of the draft SS. This paragraph sets out the guidance for firms to apply the definition of control for clients that do not prepare consolidated financial statements in conformity of UK-adopted accounting standards. It should make reference to clients that prepare consolidated financial statements in accordance with the accounting rules of a third country. The PRA has corrected this omission to facilitate the assessment of control for clients preparing their financial statements with different accounting standards.

2.16 Having considered all the responses to Chapter 4 of CP23/23, the PRA has decided to finalise the policy as proposed with a minor change to the SS as set out in paragraph 2.15.

2.17 The PRA has also provided clarificatory and editorial drafting changes across the SS on GCC to improve the clarity of the expectations without amending its substance.