Background
The UK’s PRA issued a consultation paper (CP) in November 2022, on a set of proposed regulations based on the Basel 3.1 regulations. The deadline for feedback on the proposals from industry is 31st March 2023.
What is changing?
One key change which will impact corporates is the conversion factor (CF) associated with performance guarantees (incl. bid bond, advance, performance & retention guarantees). The proposal is to increase this from 20% CF to 50% CF. The CF defines the probability that a contingent liability exposure (such as performance guarantee) will convert to an on balance sheet obligation for the bank when a claim is made by the beneficiary and the obligor fails to make payment under the guarantee.
The capital that the bank is required to keep for performance guarantee is linearly proportional to the CF and it is likely that banks will need to pass on this additional capital charge. For example, for a corporate with an external S&P rating of ‘A’, if the existing pricing for such a performance guarantee was 0.4%, this would increase to 1%.
Getting involved
The International Chamber of Commerce in the UK along with UK Finance is convening a number of organisations to provide a response to the PRA’s consultation paper.
If you would like to learn more about the consultation or get involved in the response, please contact:
Leon Yip: lyip@iccwbo.uk
ACT: technical@treasurers.org
Naresh Aggarwal
Associate Director, Policy & Technical