UK PRA revisits pandemic measures
The UK’s Prudential Regulation Authority will terminate a counter-cyclical emergency capital requirements policy adopted at the outset of the pandemic, while issuing new guidance on the treatment of deferrals under the IFRS 9 accounting standard.
On 27 August the PRA announced that from 1 October, banks will no longer be able to take advantage of a temporary offsetting measure adopted at the beginning of the covid-19 crisis in relation to the back-testing of banks’ value-at-risk (VAR) models required under the Capital Requirements Regulation (CRR).
Under the temporary policy, introduced on 30 March, the PRA permits banks to reduce their risks-not-in-VAR (RNIV) capital requirements to counter any increases they were experiencing in VAR back-testing exceptions during the market volatility at the outset of the crisis.
The CRR requires banks to back-test their internal models daily to assess whether they generate sufficient capital to absorb trading book losses. Banks are required to apply an additional quantitative multiplier to their own-funds requirements after a certain level of overshooting under the back-tests.
At the time it introduced the policy, the PRA raised concerns that this automatic application of a higher VAR multiplier under the CRR would have pro-cyclical effects during the coronavirus crisis, as the volatility increased banks’ VAR figures.
But in its new announcement the PRA said it now plans to terminate the policy in light of “quick fix” amendments the EU made to the CRR in June, in response to the coronavirus outbreak. On the urging of the European Central Bank, the CRR allowed for regulators to effectively disregard any overshooting attributable to the extraordinary circumstances of the crisis.
The PRA said that banks should apply to it to exclude any exceptions occurring between 1 January 2020 and 31 December 2021, that did not result from deficiencies in their internal models, from the calculations of their back-testing addend.
Repayment forbearances now good SICR indicators, PRA advises
The announcement came a day after the PRA issued new guidance on the treatment of mortgage repayment deferrals under the IFRS 9 accounting standard – updating its statement in March when it told banks not to treat coronavirus-related repayment holidays as significant increases in credit risk (SICRs) under IFRS 9.
Under the new guidance, the PRA says banks should consider “tailored forbearance arrangements” for borrowers unable to resume their payments after the holidays end.
But it said these arrangements are now “as likely to be as good” an indicator of SICR as they were before the pandemic.
It noted that tailored forbearances would not have, even before the pandemic, been automatically treated as an SICR. “While in some cases the position will be clear-cut, in other cases a judgment will need to be made.”
The PRA added that its March guidance may continue to be relevant to deferrals outside of the UK.
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