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COVID-19 Update: Prudential Regulatory Treatment of UK Business Interruption Loan Schemes (CBILS & CLBILS)

On 27 April 2020, the UK Prudential Regulation Authority (“PRA”) published a statement (the “statement”) on whether the guarantees provided by the UK Government (through the British Business Bank) under the Coronavirus Business Interruption Loan Scheme (“CBILS”) and the Coronavirus Large Business Interruption Loan Scheme (“CLBILS”) are eligible for recognition as unfunded credit risk mitigation (“CRM”) under the EU Capital Requirements Regulation (the “CRR”). The CRR continues to apply in the UK until the end of the Brexit transition period (currently scheduled to end on 31 December 2020).  

Unfunded Credit Protection Under the Capital Requirements Regulation

A guarantee is one form of unfunded credit protection which, where it meets the conditions in Articles 194 and 213-215 CRR, may allow a firm to adjust risk weights and expected loss amounts. The statement reminds firms that they should 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’), when determining the risk weighted exposure amounts, and seek independent advice where necessary.

The PRA considers that the terms of the guarantees provided by the Government under CBILS and CLBILS do not contain features that would render these guarantees ineligible for recognition as unfunded credit risk protection, and the effects of these guarantees would appear to justify such treatment under the relevant provisions of the CRR. The statement also notes that some of the CBILS guarantees exclude cover for interest and fees. In accordance with the CRR, the PRA considers that firms recognising the CBILS guarantees as eligible unfunded protection in relation to an exposure are required to adjust the exposure amount to exclude elements not covered by the CBILS guarantees.

Additional Guidance on Loan Underwriting

The statement also provides some limited extra guidance for firms on their loan underwriting processes during the COVID-19 pandemic. The PRA recognises that it will be challenging for many businesses to provide forecast financial information with a high degree of confidence to support firms’ loan underwriting processes. When lenders are making a credit decision, the statement reminds them that they should consider the full range of information available to them including (but not limited to):

  • the performance of the proposed borrower 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.
© Copyright 2021 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume X, Number 122



About this Author

Suzanne Bell, Cadwalader Law Firm, Finance Law Attorney
Special Counsel

Suzanne Bell is a special counsel in the Capital Markets Group in Cadwalader's London office.

Suzanne has advised leading financial institutions and corporations in connection with a wide range of domestic, European and International structured finance and capital markets transactions. Her experience includes structuring and documenting commercial paper conduits, structured investment vehicles, and public and private securitisations of a range of asset classes, with particular focus on credit card receivables, auto loans and...

Robert Cannon, Capital Markets attorney, Cadwalader law firm
Special Counsel

Robert Cannon is a special counsel in the Capital Markets Group in Cadwalader's London office.

He focuses on structured finance and securitisation, and has acted for arrangers, originators and asset managers on transactions involving a variety of structures and asset classes, including CDOs, CLOs, mortgage securitisations and commercial paper conduits.

Prior to joining Cadwalader in 2007, Robert worked in the structured finance practice at Clifford Chance's London office for two and a half years and, prior to that, in the banking and financial services group at Matheson...

+44 (0) 20 7170 8735
Stephen Day, Capital Markets attorney, Cadwalader law firm

Stephen Day is a partner in the Capital Markets Group, resident in the London office. He advises leading financial institutions and corporations in Europe and the United States in connection with a wide range of structured finance and securitisation transactions, with a focus on complex cross border deals. His work in this area includes structuring commercial paper conduits, structured investment vehicles, multi-country receivables (trade, auto loan/lease, credit card) securitisations, securitisation bridge and private equity take-out deals, whole business transactions and...

T.+44 (0) 20 7170 8535 M.+44 (0) 7944 370 395
Claire Suzanne Puddicombe, Securities attorney, Cadwalader law firm
Special Counsel

Claire Suzanne Puddicombe is special counsel at the London office of Cadwalader, Wickersham & Taft LLP in the Securitization & Asset Based Finance.

+44 (0) 20 7170 8533
David Quirolo, Capital Markets Attorney, Cadwalader, London Law firm

David Quirolo is a partner in Cadwalader’s Capital Markets Group, resident in the London office. Focusing his practice primarily on CLOs, securitisation and repackaging transactions involving various asset types in the United States and Europe, David represents banks, arrangers and asset managers in a variety of structured finance transactions. 

+44 (0) 20 7170 8635