UPDATE 1 - PRA opens door to more UK SRT
The Prudential Regulatory Authority opened a consultation period on Tuesday on proposed changes to the treatment of securitisations that could broaden the appeal of significant risk transfer transactions and allow for a wider range of structures.
The PRA is considering changing the way some banks calculate the capital treatment of securitisation positions – which could unlock the benefits of securitisation to a larger number of UK banks – and has also set out its approach for supervising unfunded credit protection in SRTs, potentially bringing in insurers as investors.
The proposals are broadly in line with what the PRA set out in a discussion paper in November 2023. The review of the regulations is part of the process of repealing and replacing EU laws following the UK's departure from the bloc in January 2020. The PRA has asked market participants to respond by January 15.
If the proposals are implemented as expected, smaller UK banks that use the standardised approach for calculating risk-weighted assets could close their first transactions under the new regime shortly after it comes into effect at the beginning of 2026.
"The universe we see is 25 challenger banks and our conservative prediction is that there will be two to five transactions being prepared next year to be closed at the start of 2026," said Jeremy Hermant, a senior adviser at Alantra who was previously head of capital markets at one such lender, Allica Bank, overseeing its first SRT, which closed earlier this year.
Banks looking to be among the first to benefit from new framework will have to start working on their projects now, as a debut transaction can take 12 months to bring to fruition. And the PRA will want them to keep the complexity of their transactions to a minimum.
“The PRA appears to want to seriously support the SRT market competitiveness," said Hermant. "However the current regulatory notification process stays in place, which will probably avoid a flurry of – to put it politely – unbridled creativity in structures.”
The regulator is also expected to take a cautious approach with regard to unfunded SRTs, in which banks buy protection from insurance companies against losses in loan portfolios to achieve capital relief.
“They are taking a principle-based approach, which means the PRA seems to be looking at insurance companies carefully to see which ones are buying SRTs and providing protection," said Hermant. "The criteria for unfunded SRT protection that will help to avoid additional risks are yet to be defined.”
Divergence
The changes to capital requirement rules are intended to mitigate the impact of the implementation of Basel III, especially the so-called output floor that is designed to reduce inconsistencies in the treatment of securitisations.
The EU has already tackled this by reducing a parameter known as the p-factor in specific cases but the PRA has taken a different approach.
Under the PRA proposals, banks using the standardised approach would be able to use a formula to calculate the p-factor depending on the characteristics of the securitisation exposures.
"It's a clear fix, it makes transactions more efficient and there is definitely a range of asset classes for which it is going to start working well," said Hermant.
Another change to the EU’s securitisation framework since 2020 has been the rollout of the simple, transparent and standardised label, which now conveys favourable capital treatment to synthetic transactions having previously only been applicable to true-sale securitisations.
The PRA does not agree with the move and is not proposing an extension of the benefits of the STS label to synthetic securitisations.
"The PRA remains of the view, taking account of responses to [the discussion paper], that extending the preferential capital treatment for STS securitisations currently set out in the Securitisation Chapter of the CRR to synthetic securitisations when replacing it with PRA rules would not, on the whole, advance its objectives," the regulator said.