PS7/25 – Update to PS9/24 on the SME and infrastructure lending adjustments

1: Overview

1.1 This Prudential Regulation Authority (PRA) near-final policy statement (PS) provides the PRA’s near-final policy on the SME and infrastructure lending adjustments to Pillar 2A (Pillar 2A lending adjustments) as outlined in PS9/24 – Implementation of the Basel 3.1 standards near-final part 2 and following consultation on its original proposals in CP16/22 – Implementation of the Basel 3.1 standards.

1.2 This near-final PS has been published alongside CP12/25 – Pillar 2A review – Phase 1, which sets out the PRA’s proposed updates to Pillar 2A methodologies and guidance to address the consequential impacts of the near final PRA rules that would implement the Basel 3.1 standards.

1.3 This near-final PS is relevant to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial or mixed financial holding companies within the scope of application of the PRA’s implementation of the Basel 3.1 standards as set out in chapter 2 of PS17/23 – Implementation of the Basel 3.1 standards near-final part 1 (firms). This near-final PS is not relevant to credit unions.

1.4 In CP7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs), the PRA proposed to apply the Pillar 2A lending adjustments to SDDTs. The details on the Pillar 2A lending adjustments for SDDTs, including changes to relevant policy materials, will be set out when the PRA finalises the simplified capital regime for SDDTs.

1.5 The PRA’s near-final methodology for setting the Pillar 2A lending adjustments for firms, as well as the data templates and accompanying instructions required for its calculation are set out in the following appendix to this near-final PS:

• Near-final amendments to statement of policy (SoP) – The PRA’s methodologies for setting Pillar 2 capital (Appendix 1).^{footnote [1]}

Implementation and next steps

1.6 The policy material in this near-final PS is published as near-final. The PRA does not intend to change the policy or make substantive alterations to the instruments before the making of the final policy material.^{footnote [2]}

1.7 The near-final policy in this near final PS will take effect on the same date as the PRA’s implementation of the Basel 3.1 standards.^{footnote [3]}

1.8 Any references related to the UK’s membership of the EU in the SoP covered by the near-final policy in this near-final PS will be updated as part of the final PS to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation are to the version of that legislation which forms part of assimilated law in the UK.^{footnote [4]}

2: Pillar 2A lending adjustments

Background

2.1 As set out in PS9/24, the PRA has decided to maintain its proposals to remove the SME support factor^{footnote [5]} and the infrastructure support factor^{footnote [6]} under Pillar 1. However, the PRA recognises concerns raised by respondents to CP16/22 on the potential impact on UK competitiveness and growth of even limited changes in capital requirements for SME and infrastructure lending. Consequently, the PRA decided to introduce the Pillar 2A lending adjustments to minimise any potential disruption to SME and infrastructure lending, and therefore growth, resulting from the removal of the support factors. This will ensure that the removal of the support factors under Pillar 1 do not cause an increase in overall capital requirements for SME and infrastructure exposures.

2.2 The PRA will implement the Pillar 2A lending adjustments for firms that submit the necessary data to the PRA (see Reporting requirements section below for more details).

Scope of eligible exposures

2.3 The PRA will calculate the SME and infrastructure lending adjustments for exposures that meet the eligibility criteria set out in ‘Instructions for Pillar 2 SME lending adjustment & infrastructure lending adjustment data templates’ (set out in Appendix 1 of the near-final SoP – The PRA’s methodologies for setting Pillar 2 capital published alongside this PS).The eligibility criteria are based on the criteria for the SME support factor and Infrastructure support factor set out in Articles 501 and 501a of the CRR respectively (prior to their revocation) and the PRA’s previous supervisory expectations on the implementation of the support factor. This includes the PRA’s expectation that the SME support factor, and therefore lending adjustment, should not be applied where the purpose of the borrowing is to support buy-to-let business as set out SS13/16 - Underwriting standards for buy-to-let mortgage contracts.^{footnote [7]}

2.4 The Pillar 2A lending adjustments will cover eligible exposures arising both prior to, and after, the PRA’s implementation date for the Basel 3.1 standards (day 1).

2.5 Exposures that simultaneously satisfy the eligibility criteria for both the SME and infrastructure support factors will be eligible for both the SME and infrastructure lending adjustments.

Approach to calculating the Pillar 2A lending adjustments

2.6 The Pillar 2A lending adjustments will be firm-specific and calibrated to hold a firm’s overall capital requirements^{footnote [8]} for SME and infrastructure lending constant compared to the situation in which the support factors had remained in Pillar 1 under the PRA’s implementation of the Basel 3.1 standards. The calculation is as follows: