The Prudential Regulation Authority has published a letter addressed to the Chair of the Working Group on Sterling Risk-Free Reference Rates. The letter responds to the Working Group's letter in October 2019 requesting regulatory forbearance or clarification from regulators on the impact that the LIBOR transition is likely to have on the prudential requirements for banks. The main issues raised by the Working Group include: (i) the potential for certain capital instruments to no longer qualify as regulatory capital; (ii) the potential for securitizations and MREL-eligible instruments to be considered as "new contracts" as a result of changes to contractual terms, leading to the need to insert bail-in or other bank recovery contractual terms; and (iii) that many banks will need to obtain regulatory approvals for alterations to the models used to determine their regulatory capital arising from their exposures and risks.
The PRA states the following in response:
Finally, the PRA stresses that it is important for banks' senior management to stay closely engaged on these issues and the risks. The PRA suggests that the Working Group and the PRA meet in spring 2020 to consider how work on regulatory issues arising from the benchmark reforms is progressing.
View the PRA's letter.
View details of the Working Group's letter to the PRA.
[View source.]