UK Prudential Regulator Publishes Policy Statement on Asset Encumbrance

The U.K. Prudential Regulation Authority has published a Policy Statement on asset encumbrance, relevant to all PRA-regulated firms other than credit unions and insurance firms. The Policy Statement takes account of the PRA's consultation on its proposed expectations of how firms manage prudential risks associated with asset encumbrance. "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's consultation aimed, among other things, to ensure that firms: (i) put in place, and document, adequate risk management processes to monitor the potential impacts of asset incumbrance; (ii) appropriately consider the effects that increased asset encumbrance may have on the restoration of financial viability during a stress scenario; and (iii) ensure that asset encumbrance levels do not unduly impact the amount and cash value of assets that could be lent against in resolution.
 
The Policy Statement contains feedback on the responses the PRA received to its consultation, as well as the following three updated Supervisory Statements reflecting the PRA's updated policy on asset encumbrance: SS 24/15 ('The PRA's approach to supervising liquidity and funding risks'), SS 9/17 ('Recovery planning') and SS 20/15 ('Supervising building societies' treasury and lending activities'). The only changes to the PRA's proposed draft policy were made to SS 20/15 to reflect that 'market counterparties' does not refer to central banks and that the PRA will expect building societies to have an 'appropriate' forward view of collateral availability, not a 'comprehensive' one, as originally proposed.
 
The Policy Statement will take effect from July 27, 2020 and will be kept under review in the context of the U.K.'s withdrawal from the EU to account for any changes to the U.K. regulatory framework at the end of the transition period.
 
View the PRA's Policy Statement on Asset Encumbrance. 
 
View details of the PRA's consultation paper on asset encumbrance.
 
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