A year after the UK Prudential Regulation Authority (PRA) published its controversial Consultation Paper (CP) 6/18 “Credit risk mitigation: Eligibility of guarantees as unfunded credit protection”, the PRA has issued feedback and revised policy positions in a Policy Statement (PS 8/19) and an updated Supervisory Statement (17/13 “Credit Risk Mitigation”) dealing with unfunded credit risk mitigation (CRM) for the purposes of calculating capital requirements under the Capital Requirements Regulation (575/2013) (CRR).
The new publications provide welcome policy revisions and the PRA has, notably, removed the proposed clarification to the meaning of “pay out in a timely manner”, clarified its position on “legal effectiveness and enforceability” and introduced provisions around risks arising from eligible guarantee arrangements and recognizing residual risks.
The new publications have allowed the finance and insurance industry to breathe a collective sigh of relief as some key issues arising from the previous proposals in the Consultation Paper have been addressed. The key positive development is that insurance, as a method of distributing risk and obtaining credit protection and the eligibility of credit insurance as an unfunded CRM has been clearly acknowledged by the PRA. Further, there is guidance for the industry generally on how to negotiate and use unfunded CRM more effectively to permit regulatory capital benefits.
Read the full Legal Update here.