On 30 September 2019, the PRA published Consultation Paper 24/19: Asset encumbrance (CP24/19).The proposals in CP24/19 are relevant to all PRA authorised firms, except credit unions and insurance firms.

In CP24/19 the PRA sets out its proposed expectations of firms when managing the key prudential risks associated with asset encumbrance, specifically in the contexts of managing liquidity and funding risks, recovery planning, and resolution. The PRA’s expectations relate both to firms’ internal monitoring and management of these risks, and to the information that firms are expected to provide to the PRA through their periodic regulatory submissions, e.g. Internal Liquidity Adequacy Assessment Process (ILAAP) documents and recovery plans.

To give effect to such expectations the PRA has set out proposed amendments to:

  • Supervisory Statement 24/15: The PRA’s approach to supervising liquidity and funding risks;
  • Supervisory Statement 9/17: Recovery Planning; and
  • Supervisory Statement 20/15: Supervising building societies’ treasury and lending activities.

Alongside the publication of CP24/19, the PRA also plans to enhance its monitoring of firms’ asset encumbrance levels and the amount of liquidity that they might be able to generate from unencumbered assets in a stress test situation. This follows the recommendations outlined in HM Treasury’s independent review of the prudential supervision of the Co-operative Bank published earlier in March 2019, which encouraged the Bank of England and the PRA to consider whether there should be constraints on the extent to which deposit-taking institutions can encumber their assets in normal circumstances and how best to factor encumbrances into the recovery and resolution plans for these institutions.

The deadline for comments on CP24/19 is 17 January 2020.