On 9 April, the PRA published an open letter to CFOs of regulated firms setting out its expectations for capital treatment in financing structures involving illiquid and structured assets, particularly in the context of SRT transactions. The PRA warns that some banks may be undercapitalising risk where the form of a transaction does not reflect the substance or underlying collateral.

The PRA flags concerns with banks’ approaches to collateral eligibility in SRT financing transactions, particularly where illiquid assets are repackaged into a tradable format and placed in the trading book without sufficient evidence to justify this treatment. It warns that some firms may be adopting imprudent regulatory capital approaches that understate risk.

The letter also highlights Basel 3.1 implementation rules under PS9/24, which will introduce three additional collateral eligibility requirements in the trading book. These include stressed market liquidity assessments, valuation reliability, and limits on reliance on unobservable inputs.

Next steps

The PRA is following up with individual firms and expects written responses by 11 June 2025. Responses should include: (a) current compliance policies, any planned enhancements, and a breakdown of the capital treatment of different collateral types.

For further information please contact Nicholas Smith ([email protected])