We have produced a first draft response to the UK PRA’s consultation CP16/22, which has significant proposals (some good, some bad) for how real estate loans are to be risk-weighted by UK banks from January 2025, and for how real estate collateral will have to be valued for risk-weighting purposes. If you would like an opportunity to review and offer feedback on the draft (we would also love to see other people’s submissions), please let Peter know and he will share it with you.. The consultation period closes on 31 March, so we need feedback by Monday 27 March at the absolute latest.
In January, we shared a note explaining some of the problems arising under the UK PRA’s proposed implementation of Basel 3.1. Our focus was on how the PRA proposes to introduce LTV-linked risk sensitivity to the Standardised Approach, and the related implications for how collateral is valued. Conversations with industry colleagues over the last few weeks suggest that while the broader implementation package is not unduly problematic, there are more issues we will have to grapple with.
The Basel 3.1 framework is what it is, having been agreed in late 2017, but the PRA is taking what strikes us as an ill-advised pick ‘n’ mix approach to following Basel 3.1 or diverging from it, at least as far as commercial real estate is concerned, with likely problematic consequences for the availability and cost of credit for the UK real estate market.
The PRA consultation runs until 31 March, and we are keen to make evidenced and member-informed submissions on relevant aspects of what is proposed, for both the Standardised Approach (see the mortgages section in Chapter 3 and last week’s note), and internal ratings-based (IRB) model users, including changes to how Slotting applies to real estate exposures (Slotting is covered in the specialised lending section in Chapter 4).
The conversations we have had with individual banks so far have been very useful. If you, or a colleague at your firm, would like to compare notes with us as we prepare our submissions over the next couple of months, please let Peter know.