On 22 May 2018, the UK Prudential Regulatory Authority (PRA) published a consultation paper setting out its proposed approach to implementing certain matters related to the coming EU Securitisation Regulation and revised securitisation capital framework under the amended EU Capital Requirements Regulation (CRR), as well as certain updated expectations on the part of the PRA with regard to significant risk transfer (SRT) securitisation.
The consultation paper proposals are described as relevant to all PRA-authorised CRD IV firms and, in relation to the Securitisation Regulation only, PRA-authorised Solvency II firms. However, given the similarity, in general, of PRA and FCA guidance where it relates to the same legislation, the consultation paper is also likely to be of interest to FCA-authorised CRD IV firms and potentially, in relation to SRT only, FCA-authorised BIPRU firms, pending separate guidance from the FCA on the matters covered.
Further, the PRA’s proposals in relation to SRT (in particular its proposals re (i) excess spread, and (ii) the assessment of commensurate risk transfer for portfolios of exposures on the standardised approach to credit risk) represent material contributions to a current European debate around reforms to the SRT regime proposed in the EBA’s Discussion Paper on Significant Risk Transfer (the EBA SRT DP). As such, they may be of interest to firms outside the scope of UK prudential regulation that participate in SRT securitisations, their regulators, and, potentially, the EBA in finalising its response to the EBA SRT DP (the EBA has until January 2021 to report back) and any resulting delegated regulation.
The PRA’s proposals in relation to the revised CRR securitisation capital framework (specifically, its approach to the exercise of discretions to restrict the use of formulae based risk weighting approaches under the new CRR hierarchy where it has concerns that they do not reflect inherent non-credit risks in transactions, or to mitigate perceived financial stability issues) are also significant.
However, it remains to be seen whether the PRA’s approach (if confirmed) will influence other European regulators in this respect, or (like PRA restrictions, in practice, around the use of the supervisory formula method (SFM) in the current risk weighting hierarchy) remain UK specific ‘gold-plating’. This briefing provides a summary of the proposals set out in the consultation paper by addressing the key matters covered in the paper with respect to each of the Securitisation Regulation, the CRR securitisation capital framework and SRT, and taking each topic in turn.
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