The Bank of England is consulting on the prudential framework for large exposures (LE), which complements the risk-weighted capital requirements by aiming to protect firms from large losses resulting from the sudden default of a single counterparty or groups of connected counterparties (GCC).
This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposals to implement the remaining Basel large exposures standards (LEX standards). The proposals include:
- removing the possibility for firms to use internal model (IM) methods to calculate exposure values to securities financing transactions (SFTs); and
- introducing a mandatory substitution approach to calculate the effect of the use of credit risk mitigation (CRM) techniques.
In this CP, the PRA is also proposing to amend the LE framework by:
- removing the option for firms to exceed LE limits for trading book exposures to third parties;
- allowing firms to exceed LE limits for trading book exposures to intragroup entities, and simplifying the calculation of the additional capital requirements;
- allowing firms to apply for higher LE limits to exposures to intragroup entities, and amend the conditions firms need to meet to mitigate the higher concentration risk;
- removing the exemption from LE limits to firms’ exposures to the UK deposit guarantee scheme (DGS);
removing the option for firms to use immovable property as CRM; and - remove the stricter requirements on exposures to certain French counterparties.
Lastly, this CP sets out proposals to merge the Large Exposures (CRR) and the Large Exposures Parts of the PRA rulebook to improve accessibility.