COVID-19: BoE and PRA aim to alleviate operational burdens to allow focus on what’s important
26 March 2020
To allow firms and regulators to better concentrate on managing the impact of COVID-19, the Bank of England (BoE) and the Prudential Regulation Authority (PRA) are halting or reviewing a range of supervisory and prudential-related activities. You can read their 20 March 2020 statement. They also provide initial guidance on the impact on IFRS 9 expected credit losses (ECLs), but have already followed that up with further guidance in a Dear CEO letter on 26 March 2020. This announcement follows a similar FCA statement on 17 March 2020.
What does this mean?
PRA supervisors plan to review their firm-level supervisory work plans so that non-critical data requests, on-site visits and deadlines can be postponed where appropriate. This includes pausing the skilled persons Section 166 reviews on the reliability of banks’ regulatory returns announced in October 2019. This will allow supervisory engagement to focus on financial stability, the safety and soundness of firms and the impact of COVID-19.
The BoE has cancelled the 2020 annual cyclical scenario stress test and has paused its liquidity biennial exploratory scenario stress test until further notice.
The PRA recognises that forward-looking information used to incorporate the impact of COVID-19 on borrowers into the ECL estimates needs to be both reasonable and supportable for the purposes of IFRS 9. The PRA believes that there is very little such information available as yet and regards the preparation of sufficiently reliable and detailed forecasts as currently very challenging. In the event firms believe such forecasts can be made, the PRA expects firms to reflect the temporary nature of the shock and fully take into account the significant economic support measures already announced by global fiscal and monetary authorities.
In particular, forecasts should recognise relief measures such as repayment holidays. The PRA considers that eligibility for UK policy on ‘the extension of mortgage repayment holidays should not automatically, other things being equal, be a sufficient condition to move participating borrowers into Stage 2 ECL’. This classification means significant increase in credit risk and is likely to result in an increase in ECL estimate.
The Bank and PRA are also reviewing their programme of regulatory change and where appropriate, intend to postpone non-critical work at the current time. This includes:
- extending Operational Resilience related consultation response deadlines six months to 1 October 2019 ( CP29/19 and CP30/19 ).
- delaying the implementation date of internal ratings based credit models relating changes arising from the ‘EBA roadmap’ (and addressed in CP21/19) to 1 January 2022
- reviewing the timetable for implementing Basel 3.1 ( also referred to as the final Basel III post-crisis reforms or Basel IV), that it recognises as challenging, and advising the Government accordingly - HMT having committed in its March 2020 policy statement to its introduction.
What do firms need to do?
Firms should review their supervisory work plans and regulatory change plans and the related resources they have allocated to the areas that the BoE and the PRA have indicated they are cancelling, suspending or reviewing. They should also consider engaging with their PRA supervisor to discuss the re-prioritisation of effort and resources.
Firms should await further BoE/PRA guidance on IFRS 9 ECLs and consider discussing their forecasting plans with their PRA supervisor.