Nicholas Edge, Principal, Prudential and Foreign Banks Policy,
UK Finance has responded to the PRA’s consultation on Credit risk mitigation: Eligibility of guarantees as unfunded credit protection, which aims to provide clarity for firms to understand when certain types of guarantees can be used as credit risk mitigation (CRM) for regulatory capital relief purposes. The PRA has elaborated on the set of criteria used in the Capital Requirements Regulation (CRR), which require that the guarantee must be payable “in a timely manner”. But there may be some serious unintended consequences with the way the PRA has defined “in a timely manner” that the guarantor should be obliged to pay out “within days, but not weeks or months”.
Credit risk mitigation (CRM) is used by our members for sound risk management reasons and, with the capital benefits provided in the CRR, enables more affordable and long-term lending to the wider economy. For example, export finance products support the supply of goods by manufacturers to overseas markets by mitigating payment and political risk for the manufacturer.
CRM reduces unnecessary capital consumption and enables our members to provide more trade finance for exporting manufacturers at a competitive cost and without the more restrictive criteria than might otherwise have been needed on an unsupported, standalone basis.
UK Finance supports the PRA’s attempt to clarify when contracts or obligations can be treated as eligible guarantees for CRM under the CRR, but we have suggested in our response to the PRA that, as currently set out, the wording in the CP would unintentionally exclude a variety of valid and economically useful risk-transfer arrangements from being defined as eligible for capital relief.
We also highlighted concerns that the proposals may lead to the UK being super-equivalent to the rest of the EU in its approach to CRM, which will likely have a detrimental effect on this important provision to the real economy, and London’s status as a centre of excellence for trade and export finance.
We look forward to helping the PRA to fulfil the objective of clarifying an issue brought to its attention, but this is a case where applying a one-size-fits-all definition will create more problems than it solves.