PS16/26 – PRA rule changes to accommodate HM Treasury’s Overseas Prudential Requirements Regime

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses the PRA received to consultation paper (CP) 3/26 – PRA rule changes to accommodate HM Treasury’s (HMT’s) Overseas Prudential Requirements Regime. It also contains the PRA’s final policy. The PRA’s final policy will amend the following Parts of the PRA Rulebook (Appendix 1):

• Glossary;
• Credit Risk: General Provisions (CRR);
• Credit Risk: Standardised Approach (CRR);
• Credit Risk: Internal Ratings Based Approach (CRR);
• Credit Risk Mitigation (CRR);
• Securitisation (CRR);
• Counterparty Credit Risk (CRR);
• Large Exposures (CRR);
• Market Risk: Advanced Standardised Approach (CRR);
• Market Risk: Simplified Standardised Approach (CRR);
• Settlement Risk (CRR); and
• Reporting (Pillar 2).

The PRA’s final policy will also amend:

• Statement of policy (SoP) 5/15 – the PRA's methodologies for setting Pillar 2 capital (Appendix 3);
• SoP5/25 – The PRA’s methodologies for setting Pillar 2 capital for Small Domestic Deposit Takers (SDDTs) (Appendix 4);
• Supervisory statement (SS) 31/15 – The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) (Appendix 5);
• SS4/25 – The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) for Small Domestic Deposit Takers (SDDTs) (Appendix 6);
• SS32/15 – Pillar 2 reporting (Appendix 7); and
• Instructions for FSA076 Pillar 2 Credit risk standardised approach (Appendix 8).

1.2 This PS is relevant to PRA-authorised UK banks, building societies, PRA-designated UK investment firms, and their qualifying parent undertakings, which for this purpose comprise financial holding companies and mixed financial holding companies (collectively ‘firms’). It is not relevant to credit unions or third-country branches.

Background

1.3 CP3/26 set out proposed amendments to the PRA Rulebook and SoP5/15 to accommodate HMT’s Overseas Prudential Requirements Regime (OPRR) and ensure that the PRA’s rules continue to function as intended with the new legislative framework. The PRA’s proposals were intended to largely maintain both the requirements on firms and the PRA’s approach to how these articles currently operate. The PRA did, however, propose targeted improvements to enhance the clarity and operationalisation of its rules.

1.4 The proposals focused on the treatment of overseas exposures within the credit risk and large exposures frameworks, including exposures to overseas institutions, eligible covered bonds, central governments, central banks, regional governments, local authorities, public sector entities, and Gibraltarian entities.

1.5 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.

1.6 In carrying out its policymaking functions, the PRA is required to have regard to various matters. In CP3/26 the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policy. The ‘Changes to draft policy’ section of this chapter refers to that explanation, considering consultation responses where relevant.

Summary of responses

1.7 The PRA received one joint response from two respondents to the CP. The names of respondents to the CP who consented to their names being published are set out at Appendix 9. The respondents generally welcomed the PRA’s proposals but made a number of observations and requests for clarification which are set out in Chapter 2.

Changes to draft policy

1.8 Having considered the response to CP3/26, the PRA has made clarificatory changes to the draft policy material where it considers this to be appropriate, as set out in Chapter 2.

1.9 The PRA has made further minor changes to SoP5/15 and introduced amendments to SoP5/25, SS31/15 and SS4/26. The PRA has also amended the instructions for FSA076 Pillar 2 Credit risk standardised approach (SA) and updated the cross-reference to these instructions in SS32/15. These changes are intended to reflect the introduction of the OPRR and the revocation of the CRR. The PRA has also made further minor corrections to SoP5/25. As set out in CP3/26, the PRA intends to consider its approach to updating references to broader reporting and disclosure instructions alongside any broader changes that may need to be made to reflect the restatement of CRR provisions in the PRA Rulebook in due course.

1.10 This PS takes account of how the policy advances the PRA objectives and of significant matters that the decision maker had regard to. The PRA considers that its analysis of its objectives and the matters it has had regard to in CP3/26 remains appropriate given that it has not made any material changes to the draft policy proposed therein.

1.11 These changes are not expected to have a different impact on firms (including mutuals) compared to the rules in CP3/26, other than to make it easier for firms to interpret the rules. The PRA therefore considers that these changes are not ‘significant’ for the purposes of section 138J(5) of the Financial Services and Markets Act (FSMA) 2000.

1.12 In addition, 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.^{footnote [1]} The purpose of these rules is to ensure that the PRA’s rules continue to function as intended with the new legislative framework established by the OPRR, including by replacing outdated references to CRR equivalence provisions with references to the relevant part of the OPRR.

Implementation

1.13 HMT has made the commencement regulations that revoke the relevant provisions of the CRR Those provisions are expected to be replaced by the Overseas Prudential Requirements Regime (Credit Institutions and Investment Firms) Regulations 2026, which will implement the OPRR and were laid before Parliament on 2 July 2026. With the agreement of HMT, the PRA has made final rules on the understanding that the statutory instrument (SI) will be made and in force prior to 1 January 2027. If the SI is amended prior to being made, or is not made, the PRA would amend or revoke the final rules as necessary.

1.14 The new rules will take effect on 1 January 2027 alongside the PRA’s implementation of the Basel 3.1 standards.

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 in response to the consultation, and to publish an account, in general terms, of those representations and its feedback to them.^{footnote [2]}

2.2 The PRA has considered the representations received in response to the CP. This chapter sets out the PRA’s feedback to those responses, and its final decisions. The PRA has also made minor changes to the draft rule instrument to improve the clarity and functioning of the rules.

2.3 The response received included feedback for HMT as well as the PRA. The PRA has not summarised or responded to feedback addressed to HMT or feedback relating to policy for which HMT is responsible.

Credit risk

Exposures to Institutions

2.4 The PRA proposed various changes to its rulebook relating to the treatment of ‘exposures to institutions’ to preserve the coherence of the regulatory framework and ensure the OPRR would have its intended effect. These proposed changes included the insertion of a defined term ‘exposures to institutions’ in the rulebook Glossary which would have resulted in the term ‘exposures to institutions’ having a different meaning where the term was italicised compared to where it was not as set out in paragraph 2.10 to 2.12 of CP3/26.

2.5 One respondent requested that the PRA use an alternative defined term to distinguish between the different meanings to improve the readability and accessibility of the rulebook. That respondent also requested consistent terminology between the rulebook and the legislative text, as the draft OPRR SI used the term ‘exposure to an institution’ instead of ‘exposures to institutions’. The respondent also highlighted accessibility considerations in the use of italics more generally.

2.6 Having considered this response, the PRA has decided to amend its proposals by re-naming the proposed Glossary term as ‘exposures to Article 119 institutions’. The PRA considers that this change will help make the rulebook more accessible. The PRA has not aligned with the terminology used in the OPRR SI because it considers that the terms are intended to have different meanings. The PRA’s definition includes exposures that are eligible for the risk weight treatment set out in Article 119 to 121 because of the OPRR SI, whereas the definition of ‘exposure to an institution’ set out in regulation 2(1) of the OPRR SI does not.

2.7 The PRA did not propose to amend its rules that prohibit the use of credit assessments which incorporate assumptions of implicit government support when assigning risk weights to institutions under the SA. The effect of this would be that such credit assessments may not be used for the purpose of assigning a risk weight to exposures to credit institutions (regardless of their jurisdiction) and designated investment firms.

2.8 The respondent argued that this restriction should apply to exposures that are risk-weighted in accordance with Articles 119 to 121 of the Credit Risk: Standardised Approach (CRR) Part of the PRA Rulebook. The respondent considered that this would be more coherent because exposures to credit institutions which are not risk weighted in accordance with Articles 119 to 121 would typically be risk weighted as exposures to corporates and therefore already receive a higher risk weight. The respondent’s proposal would exclude exposures to overseas credit institutions (and exposures to overseas designated investment firms) in countries for which HMT has not made a related designation in accordance with the OPRR SI from the requirement. It would also extend the requirement to include exposures to certain investment firms (in addition to designated investment firms) certain overseas exchanges.^{footnote [3]}

2.9 Having considered the response, the PRA has decided not to amend its draft policy. As set out in CP3/26, the effect of this decision is that credit assessments may not be used for the purpose of assigning a risk weight to exposures to credit institutions (regardless of their jurisdiction) and designated investment firms. The PRA continues to consider that this most appropriately reflects the intent of the Basel 3.1 standards to not ascribe value to implicit government support of credit institutions within the capital framework. The PRA also notes that the approach suggested by respondents could result in more conservative capital treatments for non-designated investment firms and exchanges. The suggested approach could also lead to unintended consequences where the designation of an overseas jurisdiction by HMT leads to a more conservative capital treatment.

The PRA also received feedback on the following points:

• Treatment of UK exchanges: The respondent asked for clarification on which exposures to UK exchanges may be assigned to the exposures to institutions exposure class. The PRA confirms that exposures to UK exchanges do not meet the definition of ‘exposures to Article 119 institutions’ and therefore may not be assigned to exposures to institutions exposure class.
• References to ‘exposures to institutions’ in IRB rules: The respondent noted that some references to the term ‘exposure to institutions’ in the Credit Risk: Internal Ratings Based Approach (CRR) Part of the PRA Rulebook may not have been appropriately addressed. Having considered the response, the PRA has made one correction to Article 147 of the Credit Risk: Internal Ratings Based Approach (CRR) Part.
• Use of credit assessments for exposures to institutions: The respondent sought clarification on whether the use of the new defined term in Article 120 of the Credit Risk: Standardised Approach (CRR) Part of the PRA Rulebook meant that only an issue-specific credit assessment for the exposure (as opposed to a general rating of the issuer) could be used to determine the applicable risk weight. The PRA can clarify that its changes were not intended to affect whether an issue specific or general issuer rating may be used and has decided to amend its draft rules to clarify this (see Article 119(1B) of the Credit Risk: Standardised Approach (CRR) Part). The appropriate credit assessment should be selected in accordance with Articles 138 and 139 of the Credit Risk: Standardised Approach (CRR) Part of the PRA Rulebook and the expectations set out in Chapter 11 of SS10/13 – Credit risk – standardised approach.

Exposures to covered bonds

2.10 The PRA proposed to make a number of minor changes to Article 129 of the Credit Risk: Standardised Approach (CRR) Part to ensure its rules interface effectively with the draft OPRR SI. The PRA also proposed to amend the Glossary definition of ‘eligible covered bonds’ to align the treatment of overseas covered bonds under the foundation IRB (FIRB) approach, the credit risk mitigation (CRM) framework and, where appropriate, its market risk framework.

2.11 The respondent welcomed the proposed changes and supported the alignment in treatment of overseas covered bonds under the SA, the FIRB approach and the CRM framework. The respondent noted the PRA’s commitment to consult on the liquidity treatment of third country covered bonds in due course and argued that the PRA should carry out this work as soon as possible in order to urgently clarify the treatment of third country covered bonds under its liquidity rules. They argued that the PRA should ensure that appropriate recognition is given for the purposes of high-quality liquid assets (HQLA) assessment to overseas covered bonds.

2.12 The respondent also sought clarification on the impact of the PRA’s proposal on the SDDT criterion. In CP3/26, the PRA noted that any future HMT designation of a jurisdiction for the purposes of covered bonds would bring those bonds into scope of the definition of ‘relevant credit exposures’. This could therefore affect both the calculation of the Countercyclical Capital Buffer (CCyB) rate and the eligibility criteria of the SDDT regime for individual firms.

2.13 The respondent raised a question in relation to the impact on a firm’s eligibility for the SDDT regime, and in particular the requirement that at least 85% of a firm’s credit exposures must be to obligors located in the UK on average over the past 36 months (the domestic activity criterion).^{footnote [4]} The respondents asked the PRA to clarify that any changes to the classification of covered bonds exposure classes would not apply retrospectively and therefore would not affect past calculations of the UK credit exposures ratio.

2.14 Having considered this response, the PRA has decided not to amend its draft policy in relation to the treatment of overseas covered bonds. The PRA notes that the purpose of its policy is to ensure the capital framework set out in PRA rules appropriately interfaces and aligns with the introduction of the OPRR. As set out in CP3/26, the PRA intends to consult on PRA rules to confirm firms’ role in assessing the equivalence of non-UK covered bonds included in HQLA Level 2A in due course. In advance of this, the PRA statement on 15 July 2025 remains its position. This clarified that the PRA does not expect firms to alter their existing approach to the inclusion of non-UK covered bonds in Level 2A HQLA under the Liquidity Coverage Ratio (CRR) Part of the PRA Rulebook.

2.15 The calculation of the recent average of the UK credit exposures ratio is set out in Rule 2.4 of the SDDT Regime – General Application Part of the Rulebook. Firms are required to identify the occasions (remittance dates) in the preceding 36 months on which they were required to report the geographical location of ‘relevant credit exposures’. They are then required to use this reported information to calculate the recent average. Therefore, the PRA confirms that changes to the composition of ‘relevant credit exposures’ because of HMT designating a jurisdiction for the purpose of covered bonds will not require recalculation of figures relating to previous remittance dates.

Exposures to central governments or central banks, regional governments or local authorities, and public sector entities

2.16 The PRA proposed minor amendments to Article 115 of the Credit Risk: Standardised Approach (CRR) Part to reflect the expected replacement of CRR Article 115(4) with regulation 6(3) of the OPRR SI. One respondent requested that the PRA confirm, in light of those amendments, that the two conditions embedded in regulation 6(3)(ii) are sufficient to conclude that that the regional government or local authority exposure does not pose a higher risk than the central government exposure, and that therefore no further due diligence is required.

2.17 Having considered this response, the PRA is unable to provide the confirmation sought. The PRA does not consider that its amendments to Article 115 of the Credit Risk: Standardised Approach (CRR) Part have any impact on the condition set out in regulation 6(3)(ii) of the OPRR SI. This condition is that the exposure does not pose a higher risk than the exposure to the central government because:

• the regional government or the local authority has adequate powers to raise revenue; and
• institutional arrangements are in place to reduce the risk of default of the regional government or the local authority.

2.18 The PRA considers that firms wishing to apply the treatment set out in regulation 6(3) of the OPRR SI will need to undertake appropriate due diligence to determine whether the relevant conditions are met.

2.19 One respondent reiterated a request for a review of the definition of public sector entity (PSE) which they made in response to CP19/25. The PRA responded to this request in PS14/26 – CRR Definitions: Restatement in PRA rulebook.

Large exposures

2.20 The PRA proposed amendments to the Large Exposures (CRR) part to reflect the expected revocation of CRR Article 391. These proposed changes impacted the operation of Article 390(6)(d), which relates to intra-group exposures arising from the provision of money-transmission services, and Article 395(1) which allows application of a higher large exposures limit in certain circumstances. The PRA proposed that exposures to overseas exchanges would not fall within scope of either of these provisions. It also proposed that this would be achieved by the Glossary definition of ‘exposures to institutions’ having a different definition in the Large Exposures (CRR) Part.

2.21 While the PRA received no feedback on the substantive policy proposal, one respondent argued that the PRA should not use a different Glossary definition of ‘exposures to institutions’ in the Large Exposures (CRR) Part. They argued the PRA should instead carve out exposures to exchanges in the relevant Large Exposures rules themselves.

2.22 Having considered this response, the PRA has decided to introduce a new Part-specific defined term ‘relevant exposures to Article 119 institutions’ in the Large Exposures (CRR) Part. This will have the effect of carving out exposures to exchanges from the relevant Large Exposures rules.

2.23 The respondent asked the PRA to consider making other changes to its large exposures rules on the treatment of covered bonds. These changes were unrelated to the impact of designation under the OPRR. Having considered this feedback, the PRA has made no changes to its proposals as it considers this feedback to be outside of the scope of CP3/26.