On 18 October 2024, the Prudential Regulation Authority (PRA) issued Consultation Paper 14/24 – Large Exposures Framework (CP14/24).

CP14/24 is relevant to PRA-authorised UK banks, building societies, PRA-designated investment firms, PRA-approved holding companies, PRA-designated holding companies and other Capital Requirements Regulation (CRR) consolidation entities.

Background

The large exposures framework in the UK consisted of requirements set out in Part Four of the CRR. The Financial Services Act 2021 removed these requirements and empowered the PRA to apply large exposures standards in PRA rules. These rules were transferred into the Large Exposures (CRR) Part of the PRA Rulebook in January 2022. Some rules were amended to implement the Basel large exposures standards as set out in PRA Policy Statement 22/21 – Implementation of Basel standards: Final rules. The remainder of the rules were transferred without material modifications.

Consultation

In CP14/24 the PRA sets out proposals to implement the remaining Basel large exposures standards. Such proposals include:

  • Removing the possibility for firms to use internal model (IM) methods to calculate exposure values to securities financing transactions (SFTs).
  • Introducing a mandatory substitution approach to calculate the effect of the use of credit risk mitigation (CRM) techniques.

The PRA also proposes to amend the large exposures 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.
  • Removing the option for firms to use immovable property as CRM.
  • Remove the stricter requirements on exposures to certain French counterparties.

Also, the PRA sets out proposals to merge the Large Exposures (CRR) and the Large Exposures Parts of the PRA Rulebook to improve accessibility. The PRA also proposes to update Supervisory Statement 16/13 – ‘Large Exposures’ to amend the PRA’s expectations in light of the proposed changes set out in CP14/24.

Next steps

The deadline for comments on CP14/24 is 17 January 2025.

The PRA states that:

  • The implementation date for the changes resulting from the proposals would, except for the proposal on SFTs, take effect shortly after publication of the final Policy Statement.
  • As a result of the changes to rules 2.1 and 2.2 of the Large Exposures Part of the PRA Rulebook, any modifications granted in respect of these rules will no longer be effective.
  • The PRA recognises that this may not leave sufficient time for affected firms to apply for a higher non-core large exposures group (NCLEG) permission. The PRA proposes therefore that affected firms be offered a modification by consent to maintain the current position until March 2026.
  • The PRA considers that this will allow affected firms sufficient time to apply for the higher NCLEG permission.
  • NCLEG non-trading book and trading book permissions that were granted by the PRA prior to the effective implementation date would remain in place.
  • Firms would no longer be required to allocate the trading book exposures they have to their NCLEG in ascending order of specific-risk requirements.
  • The proposal to remove the possibility for firms to use IM methods to calculate exposure values to SFTs would take effect on 1 January 2026.