UK Finance has responded to the PRA's consultation on the eligibility of financial collateral as a credit risk mitigant.

Our response was broadly supportive of the PRA's objective of ensuring that financial collateral, such as bonds and equities, and the credit risk of the obligor that the collateral is offsetting  are not materially  positively correlated because of geographic, business model or legal connectedness.

But we raised concerns about the impact of the PRA's proposals on the margin lending market, particularly where a bank lends against a single financial asset, rather than a portfolio. We pointed out that banks already used a range of structural features  to mitigate this risk, including excess collateralisation and requirements on the borrower to top up collateral if it falls in value. We suggested that the gap risk approach, used in calculating market risk, could be a Pillar 2 proxy for assessing any extra capital requirements relating to the potential connectedness between the obligor and the collateral pledged to mitigate the risk.