Coronavirus (COVID-19)—PRA statement and UK Finance comments on changes to CBILS and CLBILS

The Prudential Regulation Authority (PRA) has issued a statement in response to the changes to the UK Coronavirus Business Interruption Loan Scheme (CBILS) and the UK Coronavirus Large Business Interruption Loan Scheme (CLBILS) announced by the government on 27 April 2020. The PRA’s statement, which is intended to complement the government’s announcement, explains the regulatory treatment of the CBILS and CLBILS under the Capital Requirements Regulation (EU) 575/2013 (CRR).

In its 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 are eligible for recognition as unfunded credit risk mitigation (CRM) under the CRR.

The PRA says it considers that the terms of the guarantees provided by the Secretary of State under the schemes do not contain features that would render the guarantees ineligible for recognition as unfunded CRM, and that the effects of these guarantees ‘would appear to justify such treatment’. However, it also notes that some CBILS guarantees exclude cover for interest and fees, so firms recognising the CBILS guarantee as eligible unfunded protection in relation to an exposure must adjust the exposure amount to exclude elements not covered by the CBILS guarantee.

The statement is not intended as an exhaustive description of the prudential requirements applying to loans under the schemes or as a comprehensive description of the regime under which CRM techniques impact the calculation of risk-weighted exposure amounts. The PRA says firms should review relevant articles of the CRR and any relevant PRA rules and guidance (including its supervisory statement SS17/13 on credit risk mitigation), and where necessary seek independent advice to confirm that all the applicable requirements and expectations have been satisfied.

The PRA also sets out its expectation that, given the current extraordinary circumstances and the resulting challenges in forecasting financial information, lenders should use their judgement on what information is required to make credit decisions. Lenders should consider the range of information available to them, including the performance of the business prior to the coronavirus (COVID-19) outbreak, a view of how the loan will be repaid in due course (relying on judgement in the absence of forecast financial information), and the general prospects for the sector in which the business operates once the effects of the pandemic have receded.

UK Finance joint statement in response to CBILS changes

UK Finance has issued a joint statement on behalf of the seven largest small and medium-sized enterprise (SME) lenders, in response to the changes to CBILS. The statement said that ‘The reforms to CBILS announced by the British Business Bank and HM Treasury with the support of the regulators provide welcome changes that should enable banks to provide finance to businesses more quickly alongside other forms of support including capital repayment holidays.’

It highlighted the work being carried out by lenders to ensure they provide support ‘swiftly and responsibly’ and said they would ‘continue to work closely with customers to help them identify the finance that is right for their business and financial circumstances’. Following the changes to CBILS, the statement confirmed lenders would only ask businesses for information and data ‘they might reasonably be able to provide at speed’ and would not require the provision of forward-looking financial information or business plans for businesses applying for CBILS-backed lending, relying instead on their own information to assess credit and business viability.

Sources: PRA statement on the regulatory treatment of the UK Coronavirus Business Interruption Loan Scheme (CBILS) and the UK Coronavirus Large Business Interruption Loan Scheme (CLBILS)

UK Finance issues joint statement on behalf of seven largest SME lenders

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