Today, PCS submitted its response to the PRA on its consultation on how best to handle the introduction of the output floor pursuant to Basel 3.1 as it relates to securitisation.
Although welcoming the PRA’s suggestions, PCS felt bound to point out that all the obvious difficulties that flow from a rigid application of the proposed Basel rules to securitisations – and especially SRT securitisations – flow from the original miscalibration of the capital requirements. More specifically, they flow from an incorrectly calibrated non-neutrality factor. This is then made worse by structural flaws in the current CRR architecture that results in doubling-up the prudential buffers. Therefore, PCS urges the PRA to go beyond ad hoc, stop-gap measures designed to ameliorate the most egregious outcomes of the currently miscalibrated framework and fix, once and for all, the Pillar 1 non-neutrality issue. For reasons set out in our response, we do not believe that leaving this issue to the Basel Committee is the best way to proceed.
The response also addresses, of course, the specific proposals put forward by the PRA and seeks to answer the question of whether STS should be extended to synthetics (as it has been in the EU). PCS tried to show why, for reasons of prudential coherence, competitiveness within the UK banking system and the international competitiveness of the UK as a whole, such extension should be put in effect. PCS also sought to demonstrate how, subject to some modifications of the current scheme. this can be done with no negative impact on the soundness of the UK banking system.