Shearman & Sterling LLP | FinReg | UK Prudential Regulator Launches Consultation on Asset Encumbrance Rules
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  • UK Prudential Regulator Launches Consultation on Asset Encumbrance Rules

    The U.K. Prudential Regulation Authority has launched a consultation on its proposed expectations of how firms manage prudential risks associated with asset encumbrance. The PRA’s expectations are relevant to all PRA-authorized firms, other than credit unions and insurance firms. Responses should be submitted by January 17, 2020.

    “Encumbered assets” are those that are used to secure, collateralize or credit-enhance a transaction and so cannot be freely transferred or liquidated by the pledging party. The PRA makes clear that while it does not view asset encumbrance to be undesirable in itself, elevated encumbrance can pose prudential risks that the PRA believes firms should consider as part of their resolution preparations. The PRA is proposing to make changes to certain of its Supervisory Statements to clarify that:
    • Firms should consider, and establish risk management processes in respect of, the potential impact of asset encumbrance on their funding profiles;
    • Firms should document these actions in their Internal Liquidity Adequacy Assessment Processes;
    • Building societies should manage their asset encumbrance in line with the PRA’s existing and proposed expectations;
    • Firms should consider the effects of increased asset encumbrance on their abilities to ensure their financial viability in a stress scenario; and
    • Firms should ensure that their asset encumbrance levels do not unduly impair the amount and cash value of their assets that could be lent against in resolution.
    The PRA also intends to enhance its monitoring of firms’ asset encumbrance levels and the potential for liquidity generation from unencumbered assets in a stress scenario.

    View the PRA's Consultation Paper.
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