Statement by the PRA on the Capital Requirements Regulation (CRR) ‘Quick Fix’ package

Transitional arrangements for capital impact of IFRS 9 Expected Credit Loss (ECL) accounting

The CRR ‘Quick Fix’ introduces new transitional arrangements for the capital impact of IFRS 9 ECL provisions. For relevant provisions raised from Wednesday 1 January 2020, the CET1 add-back percentages are set at 100% in 2020 and 2021, 75% in 2022, 50% in 2023, and 25% in 2024.^{footnote [3]}

The PRA’s views

On Monday 25 September 2017, Sam Woods, Deputy Governor, wrote to CEOs highlighting and supporting arguments in favour of IFRS 9 transitional arrangements.^{footnote [4]} The CRR ‘Quick Fix’ revises the transitional arrangements. It implements the agreement of the Basel Committee on Banking Supervision (BCBS) in April 2020.^{footnote [5]}

The PRA’s intention remains that, subject to the need for sufficient resilience at the end of the transitional period, all aspects of supervision of a firm using the transitional arrangements would be carried out using ‘transitional’ data on capital resources and not ‘fully loaded’ figures. In particular, as stress tests should reflect how stress would be experienced, those tests should fully take account of the revised transitional arrangements.

The PRA’s intention remains that, subject to the need for sufficient resilience at the end of the transitional period, all aspects of supervision of a firm using the transitional arrangements would be carried out using ‘transitional’ data on capital resources and not ‘fully loaded’ figures. In particular, as stress tests should reflect how stress would be experienced, those tests should fully take account of the revised transitional arrangements.

Follow up

Firms already applying the CRR transitional arrangements for IFRS 9 will need to implement the revised calculations set out in the CRR ‘Quick Fix’, including amending the CET1 add-back factors applied to relevant ECL provisions for 2020–24.

Firms currently applying the transitional arrangements that are considering ceasing to apply them should note that, under the CRR, doing so would require the PRA’s permission. If a firm wishes to apply for PRA permission no longer to apply the transitional arrangements, we encourage it to contact its PRA supervisor with a request by Friday 31 July 2020, including a written explanation of the basis on which its management body has satisfied itself of the continuing adequacy of the firm’s financial resources, including in stressed scenarios. Its supervisor will discuss the matter with it in the context of supervision of the firm’s resilience and capital adequacy.

Acceleration of certain CRR II measures, and a temporary prudential filter on certain unrealised gains and losses

The CRR ‘Quick Fix’ accelerates the date of application of the revised SME support factor and the infrastructure support factor. It also includes a temporary discretion for firms until Saturday 31 December 2022 to remove a proportion of unrealised gains and losses on exposures to certain public sector authorities. The CRR ‘Quick Fix’ also applies the revised treatment of software assets from the date on which EBA regulatory standards that will specify their prudential treatment enter into force.^{footnote [6]}

The PRA’s views

These measures do not derive from BCBS agreements and are specific to the CRR. The PRA does not currently have adequate information on their quantitative impact. The PRA would like to understand better their impact on firms’ capital positions, and any implications they may have for firms’ safety and soundness.

Follow up

The PRA intends to request data to facilitate quantitative analysis of the impact of these CRR ‘Quick Fix’ measures. Analysis of those data, and the EBA’s final regulatory technical standards on software assets, will inform the PRA’s supervisory approach including an assessment of whether further action is necessary under Pillar 2.