On 27 April 2020, the PRA issued a statement concerning the regulatory treatment of the UK Coronavirus Business Interruption Loan Scheme (CBILS) and the UK Coronavirus Large Business Interruption Loan Scheme (CLBILS).
In the statement the PRA sets out its observations on whether the guarantees provided by the Secretary of State for Business, Energy and Industrial Strategy under the CBILS and CLBILS (together the schemes) are eligible for recognition as unfunded credit risk mitigation (CRM) under the Capital Requirements Regulation (CRR).
The statement does not provide an exhaustive description of the prudential requirements that apply to loans extended by participating banks to businesses under the schemes, nor is it a comprehensive description of the regime under which CRM techniques impact the calculation of risk-weighted exposure amounts. Firms are encouraged to review relevant articles of the CRR, and any relevant PRA rules and guidance (including expectations set out in the PRA’s Supervisory Statement on credit risk mitigation – SS17/13 ‘Credit risk mitigation’). The PRA states that where necessary, firms should seek independent advice to confirm that all the applicable requirements and expectations have been satisfied.
The statement also provides that in the current extraordinary circumstances, it will be challenging for many businesses to provide forecast financial information with a high degree of confidence to support firms’ loan underwriting processes. Given that, the PRA expects lenders to use their judgement on what information is required to make credit decisions. The PRA reminds lenders that they should consider the range of information available to them including (but not limited to): the performance of the business prior to the COVID-19 outbreak; a view of how the loan will be repaid in due course, relying on judgement in the absence of financial forecast information; and the general prospects for the sector in which the business operates once the effects of the pandemic have receded.