The Prudential Regulation Authority (PRA) has published a Dear CFO letter outlining its prudential expectations regarding practices related to illiquid and structured financing portfolios. The PRA focuses on significant risk transfer (SRT) financing activities, but holds a wider expectation that firms should consider its expectations for all relevant financing portfolios. The PRA emphasises the expectation that firms analyse the characteristics of different collateral types when determining the appropriate regulatory capital treatment. The PRA is concerned that not all firms conduct sufficiently through assessments of collateral eligibility and that some firms have adopted imprudent approaches to the recognition of collateral for regulatory capital purposes, leading to an undercapitalisation of risks. The PRA highlights that its expectations align with the near-final rule changes for implementation of the Basel 3.1 Standards.
The PRA expects firms to consider the concerns identified in the letter and ensure, where needed, that policies, control frameworks and reporting are enhanced to address them. Supervisors will be requesting relevant firms to provide a response to the letter by 11 June.
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