Banking and finance regulatory news, December 2020

Shari’ah compliant non-interest based deposit facility: BoE speech

The Bank of England (BoE) has published a speech[8] by Andrew Hauser, BoE Executive Director, Markets, on why Islamic finance has an important role to play in supporting the recovery from COVID-19 and how the BoE’s new Shari’ah compliant non-interest based deposit facility can help. Points of interest in Mr Hauser’s speech include:

  • the Basel III liquidity rules give national supervisors discretion to treat sukuk as high quality liquid assets (HQLA), subject to haircuts or other conditions. However, the proportion of sukuk classed as eligible for regulatory buffers remains relatively modest compared to demand. Islamic banks can therefore face an uneven playing field relative to conventional banks when it comes to liquidity management;
  • in 2015, the BoE began work to assess the feasibility of establishing a standalone non-interest based facility, aimed at providing greater flexibility to UK Islamic banks in meeting their Basel III liquidity requirements. It consulted on possible models in 2016 and 2017;
  • following this process, the BoE’s new Alternative Liquidity Facility (ALF) will launch in Q1 2021. The ALF will provide UK Islamic banks (and other UK banks with formal restrictions on engaging in interest-based activity) with greater flexibility in meeting HQLA requirements, enabling them to hold a reserves-like asset in a non-interest based environment;
  • the ALF will be structured as a wakalah or fund-based facility (that is, participant deposits will be backed by a fund of assets, the return from which, net of hedging and operational costs, will be passed back to depositors in lieu of interest);
  • the ALF will grow as the UK Islamic bank sector grows, and it will be well-placed to exploit the growing diversification of available HQLA-eligible sukuk assets; and
  • over the coming months, the BoE will finalise legal documentation, complete its operational testing and begin the onboarding process for eligible applicants. Firms should expect to commence this work from January 2021. Once operational, the ALF will help put the UK Islamic finance sector on a more level footing, giving firms greater flexibility in meeting liquidity requirements, and helping them compete with conventional peers while staying true to their founding principles.

Implementing CRD V: PRA update

The PRA has published a statement[9] explaining when firms can expect further information on the PRA’s approach to transposing CRD V, including its approach to revisions to the definition of capital for Pillar 2A. The PRA states that it intends to publish a policy statement by mid-December 2020. It will summarise the responses to its consultation and explain the PRA’s policy approach, including any further supervisory processes required for implementation.

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