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:
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.
[View source.]