On 31 October, the Prudential Regulatory Authority (PRA) published a discussion paper (DP3/23) outlining issues related to capital requirements for the securitisation exposures of PRA-authorised firms under the Capital Requirements Regulation (CRR).  This discussion paper will inform further work on draft PRA rules to replace relevant firm-facing requirements in the Securitisation Chapter of the CRR.  The PRA will produce a consultation paper in 2024 H2, subject to HMT taking steps to bring into effect the repeal of the Securitisation Chapter of the CRR.

This discussion paper considers:

• The calibration of the Pillar 1 framework for determining capital requirements for securitisation exposures and their interaction with the Basel 3.1 output floor, which the PRA proposed to implement in consultation paper CP16/22 – Implementation of the Basel 3.1 standards.  The PRA is considering a range of policy options on which it is seeking evidence.  These include:
  • Going ahead with implementation of the Basel 3.1 output floor without any adjustment to the Pillar 1 framework for determining capital requirements for securitisation exposures.
  • Undertaking a targeted and evidence-based adjustment to the Pillar 1 securitisation capital framework.

The PRA discussion paper also considers that the relevant standards of the Basel Committee on Banking Supervision (BCBS) are an important reference point for the PRA’s primary objective of safety and soundness of firms, and alignment with these would address prudential risks associated with securitisation exposures.  The PRA added that it would support a wider review by the BCBS of Basel standards relating to the Pillar 1 securitisation capital requirements, explaining that these have not been implemented uniformly across jurisdictions, and their interaction with the Basel 3.1 output floor raises questions about their design and calibration.

• The hierarchy of methods for determining capital requirements for securitisation exposures.  This discussion paper draws attention to a divergence of the current hierarchy of methods in the Securitisation Chapter of the CRR from the Basel standards.  It also explores the possibility of better aligning the hierarchy in the Securitisation Chapter of the CRR with the Basel standards and seeks views and evidence from respondents on the possible impacts.

• The specification of securitisations that qualify as STS and associated preferential prudential treatment.  This discussion paper considers the scope of the UK framework for simple, transparent and standardised (STS) securitisations.  The UK framework is currently aligned with the Basel standards in that it covers traditional (funding) securitisations meeting the eligibility criteria, but not synthetic securitisations. The discussion paper sets out policy considerations that would on balance support maintaining this approach.

This DP is relevant to PRA-authorised CRR firms that manufacture or invest in securitisations. It is also relevant to qualifying parent undertakings, which for this purpose comprise financial holding companies and mixed financial holding companies, as well as credit institutions, investment firms, and financial institutions that are subsidiaries of these firms. This DP may also be of interest to other firms that are involved in securitisation markets, for example firms providing credit risk mitigation or External Credit Assessment Institutions (ECAIs).

The PRA is seeking views and evidence from market participants on possible approaches to these issues.  Feedback can be submitted to [email protected] until Wednesday 31 January 2024.

For more information, please contact Guillermo Pérez Molina, Private Credit Associate.