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The Prudential Regulation Authority does not perform ClickBait, so it will be permitted to skip rulebook updates from UK banking regulators based solely on this heading.
PRA Rulebook Liquidity Coverage Ratio Changes by Agreement
It’s a dead link now, but if you clicked yesterday, you’re allowing companies that have been mistakenly applied to companies (LCRs) that have mistakenly applied rules that rely on Level 2A high quality liquid assets (HQLA) of “Liquidity Coverage Ratio (LCR)” to be aware of these bonds and recognised the restricted bonds. This change took effect immediately on April 8th.
What does that mean? The subject – the bank’s capital buffer – is important enough to guarantee clarity. Asset class, covered bonds are widely held. The phrase “I applied the rule incorrectly” suggests a company’s mechanism for counting the wrong things in a buffer to correct mistakes.
It’s the rule to be confused. People told us that the change was a retroactive action by regulators to erase rules that companies were unable to apply correctly.
We asked the PRA. Those familiar with the mechanism agreed to the above reading and said the rules regarding covered bonds are invalid as regulators have never tested the quality of these bonds. Soon after that, the person told us to ignore the guidance and promised an update that never came. Repeated requests to regulators over the course of several days were not further clarified.
This morning, PRA posted an update saying it had elicited changes.
The PRA has received many technical comments and requests for clarification. As a result, the PRA decided to suspend the process and withdraw the amendment in order to take into account and address the points that were properly raised. Once that process is complete, the PRA will clarify its approach.
In the interim, PRA believes that companies do not need to modify their approach to recognize third-state covered bonds based on the liquidity coverage ratio (CRR) and liquidity (CRR) portion of the PRA rulebook
It worked by April 8th.
Banks must maintain sufficient high quality liquid assets to cover net cash outflows beyond 30 days of serious stress. Most buffers should be made of “very high quality covered bonds” called cash, central bank reserves, certain sovereignty support securities, or level 1 assets. Lower quality covered bonds will be combined with level 2 high-risk ones. This is divided into A and B like this.
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The PRA previously stated that it counts eligible bonds issued by third countries as level 2A assets. They had to be regulated at least by UK standards, the cover pool should have exceeded the amount needed to meet the claim, and if the issuer was the default, the bondholder had to take priority.
However, those who described the change showed that PRA never showed any views on which of the lower-quality non-uk covered bonds is comparable to UK bonds.
To keep things in order, the original plan was to allow non-uk eligible bond holdings purchased by the end of January to be able to be rolled off. These count in liquidity buffers under the old rules, but their value is concluded and cannot be replaced in the same way with sales, maturity, or redemption. In reality, the holdings must gradually expand towards zero.
The more destructive effect was to drive large buyers out of the small market. According to Socgen’s chart below, the sterling covered bond is a niche compared to the total. . .
. . . It tends to be acquired by UK investors. . .
. . . However, it may also be issued by British institutions.
By changing the rules, the PRA will reduce the available investor base of Sterlingcover bonds and give few incentives to continue issuing for Canadian and Australian companies. Fluidity will suffer.
“This will improve the demand for assets and gold leaf controlled by UK Sterling, but will concentrate UK sovereignty risks on the UK bank’s Treasury and local investors,” Socgen analyst Anamika Misra said in a memo released last week. She compared the change in the PRA to her preference for British publishers with protectionism like Trump.
The prices of Sterlingcover bonds over the past week appear to have been burned in some of their uncertainties. But perhaps the most surprising thing was the timing.
The European Commission is expected to submit its own report by July on how to approach third countries’ equivalence when counting capital buffers, and the law is expected to continue next year. As Misra wrote last week, the current move for the PRA has placed it on a collision course with Europe, as it is widely expected that EC will take a more university approach.
Fair treatment in exchange for fair treatment? Well, in an ideal world, I’m hoping for this. If Europe opens the door to third country’s equivalence, it is expected that comparable countries will treat the covered bonds on par with domestically covered bonds. The UK appears to be against this ideology. The EU is a large market for targeted bonds and believes that policies like the UK will not be incorporated. We believe we will stick to the policy of including covered bonds issued by EEA or non-EEA G10 countries.
Can PRA release revised guidance before the EC report lands? Or will the UK’s protectionism proposal continue to take over consultations? Either way, it’s completely unnecessary confusion.
