Between 2019 and 2024, the Prudential Regulation Authority (PRA) revised its Supervisory Statement on Credit Risk Mitigation (CRM) to reflect the UK’s near-final implementation of Basel 3.1, regulatory streamlining post-Brexit, and a sharpened supervisory focus on residual risk management. While the 2019 statement provided a detailed and at times transitional framework aligned with retained EU law (CRR), the 2024 update is more targeted, removing obsolete guidance and introducing new content to strengthen alignment with the revised capital framework. This paper outlines the material differences between the two versions, focusing only on additions, deletions, or substantive changes, and concludes with an assessment of the evolving regulatory stance.
Eligibility of Protection Providers
The 2024 statement removes the prior guidance that had explicitly dismissed the existence of eligible providers under CRR Article 119(5). In 2019, the PRA stated there were no such financial institutions that qualified as eligible protection providers and therefore no list would be published.
Recognised Exchanges
In 2019, the PRA explained criteria for exchanges to qualify as “recognised” under CRR, drawing on legacy EU MiFID II definitions and publishing a list of approved exchanges. This entire section is deleted in the 2024 version.
0% Volatility Adjustment Under FCCM
The 2019 statement ruled out the existence of “core market participants” beyond those named in CRR Article 227(3) eligible for a 0% volatility adjustment under the Financial Collateral Comprehensive Method. This chapter is removed in the 2024 version.
Use of Own Estimates of Volatility
A significant change is the complete deletion of 2019’s detailed guidance on permission to use own estimates of collateral volatility under CRR Article 225. This included documentation standards, model governance expectations, and back-testing protocols.
Netting of Liabilities Subject to Bail-In
There is no substantive change to this section. However, the 2024 update introduces minor editorial adjustments, such as referencing the “Credit Risk Mitigation Part of the PRA Rulebook” instead of “Part Three of the CRR”. The regulatory stance remains firm: if resolution authorities can apply bail-in on a gross basis, netting arrangements are ineligible for CRM recognition.
Guarantees and Credit Derivatives as Unfunded Credit Protection
Chapter 7 undergoes the most extensive set of changes:
- Title and scope expanded: The chapter now explicitly includes credit derivatives and credit insurance products alongside guarantees. In 2019, only guarantees were named, though derivatives were implicitly covered.
- Clarification on credit insurance: The 2024 version introduces a new provision clarifying that credit insurance (e.g., mortgage indemnity insurance) can be treated as CRM if it meets the unfunded protection definition. This was absent in 2019.
- Enhanced legal enforceability language: The 2024 statement strengthens the requirement for enforceability, explicitly referencing incorporation jurisdictions and stressing the need for practical enforceability across all relevant legal frameworks.
- Expanded guidance on coverage: New emphasis is placed on whether the CRM instrument fully covers all types of obligor payments. The 2024 text cautions that limited payment coverage (e.g., excluding interest or fees) may result in reduced CRM recognition.
- Shift in residual risk treatment: The 2019 version contained a brief note on residual risks. The 2024 statement replaces this with a more forceful expectation that firms must manage residual risks under Pillar 2. It cross-references ICAAP/SREP and warns that capital add-ons may apply where risks like guarantor default, legal uncertainty, or basis risk are inadequately mitigated.
- No easing of criteria: Despite expanding the scope, the 2024 update maintains strict eligibility rules such as prohibited clauses and conditions that delay or void payment (e.g., requiring pursuit of the borrower first) still disqualify CRM eligibility.
Financial Collateral and Correlation With Obligor Credit Quality
The core guidance from 2019 namely, that collateral must not be materially positively correlated with the obligor’s credit quality remains unchanged in 2024. However, the PRA introduces a new paragraph 8.5A, which adds nuance to its treatment of wrong-way risk. This paragraph provides a conditional exception to the general correlation prohibition, acknowledging that in certain structured transactions (e.g. fully margined loans or dynamically adjusted exposures), the risk of correlation may be mitigated. If the exposure amount itself reduces in line with the collateral’s market value, thus maintaining a stable risk profile, then the collateral may not be deemed materially correlated under the CRR definition. This refinement did not exist in the 2019 guidance and signals a more sophisticated recognition of modern collateral management techniques.
The 2024 version also includes clarifications via footnotes that expand on the concept of “total value of assets to which the lender has recourse.” It now explicitly includes the obligor’s unencumbered assets and potentially the assets of third-party guarantors. These refinements are designed to reinforce the analytical principle that if collateral value tracks the same asset base the loan depends on for repayment, correlation concerns remain. Importantly, these additions do not soften the PRA’s original position but rather enhance its applicability by accounting for structured finance practices. The tone remains firm, with examples such as non-recourse loans and special purpose entities reiterated as classic wrong-way risk scenarios that render collateral ineligible.
Non-Financial Collateral Under the Standardised Approach (Added)
A new Section 9 has been added in the 2024 supervisory statement to address the treatment of non-financial collateral – a topic that was not covered in the 2019 edition. The PRA explicitly states that firms using the Standardised Approach are not permitted to recognise non-financial collateral (such as inventory, plant, or property) for CRM purposes. This clarification aligns with the CRR and UK rulebook definitions, which limit CRM eligibility to certain forms of financial collateral. By inserting this chapter, the PRA removes any ambiguity about the capital treatment of physical or non-financial security in the Standardised framework.
At the same time, the 2024 statement acknowledges that non-financial collateral should still be reflected where relevant – for instance, in internal credit assessments or where the standardised framework allows risk weight adjustments based on collateral characteristics. While this does not translate into direct CRM recognition or capital relief, the PRA signals that collateral should not be ignored entirely in credit risk analysis. This guidance helps codify the boundary between credit risk mitigation (as a regulatory concept) and prudent risk management. Its inclusion suggests the PRA is responding to potential misinterpretations in prior practice or feedback gathered during Basel 3.1 consultations.
Obligor Grade Adjustment in IRB Models
New in 2024, this section introduces clear supervisory expectations on how IRB firms should treat credit support arrangements such as guarantees or group backing when adjusting borrower ratings. The PRA clarifies that under CRR Article 172(1)(e), firms may reflect support arrangements via obligor grade adjustment (i.e., by improving the probability of default, or PD). This is typically used where the support is meaningful but does not qualify as formal CRM for Pillar 1 capital relief.
However, the PRA draws a sharp boundary: firms may not simultaneously apply a PD adjustment and recognize the same support under the Loss Given Default (LGD) adjustment method, as permitted by CRR Article 171(3)(b). In effect, a firm must choose between adjusting PD or LGD, but not both, for the same support, to avoid double counting credit mitigation.
This clarification is important because in 2019 there was no explicit supervisory guidance on this point. The 2024 addition reinforces model integrity by preventing firms from overstating credit risk reduction. The tone is instructive but firm, emphasizing that support arrangements must be treated consistently within IRB models and must not be double-recognized through multiple dimensions of the capital framework. This change reflects both PRA supervisory insight and Basel 3.1 guidance, responding to potential inconsistencies observed in practice.
Funded Credit Protection Securing Unfunded Credit Protection
Also new in 2024, Section 11 introduces supervisory guidance on layered CRM structures, where a funded credit protection (e.g. cash collateral) is used to secure an unfunded protection (e.g. a guarantee). This scenario, sometimes referred to as “double default” or stacked CRM, is governed by new rules under CRR Article 191A, introduced through Basel 3.1.
The PRA now formally addresses how such structures may be treated for capital purposes. While recognizing that it is possible for an exposure to benefit from both types of CRM, the PRA stresses that both layers must independently meet eligibility conditions including legal certainty, enforceability, and operational effectiveness. For example, if a guarantor’s obligation is collateralised with eligible, enforceable collateral (such as high-quality liquid assets), this additional protection might reduce the risk to the bank but only if all CRM criteria are satisfied.
The PRA also makes clear that firms must avoid double counting risk mitigation when both funded and unfunded protections are involved. This might mean that the overall capital benefit is limited to the lesser of the protections, or adjusted via a specific double default framework, rather than summing the capital benefits of both layers. By introducing this section, the PRA is proactively clarifying a complex and previously unaddressed area, one that could lead to over-optimistic risk weighting if misapplied.
The regulatory tone is clear and cautionary: firms are expected to conduct robust assessments and ensure layered CRM structures are genuinely risk-reducing before they are recognised in capital models. The PRA’s inclusion of this section reinforces its commitment to sound risk recognition and capital adequacy, especially as financial engineering around credit protection becomes more sophisticated.
Conclusion
The 2024 Supervisory Statement on Credit Risk Mitigation (based on near-final Basel 3.1) updates and refines the 2019 guidance on multiple fronts. The structure is reorganized to highlight current priority topics, definitions are modernized (e.g. inclusion of credit insurance and derivatives), and supervisory guidance is both broadened (new topics) and made more specific (enhanced expectations for guarantees and collateral). The overarching regulatory intent – ensuring credit risk mitigation techniques truly reduce risk and meet strict eligibility criteria – remains consistent, but the 2024 statement is more comprehensive and aligned with the latest Basel standards.