Part 8 – Prudential Treatment

The prudential treatment of payment commitments should aim to ensure there is a level playing field and mitigate the procyclical effect of such commitments depending on their accounting treatment.

Where the accounting treatment results in the payment commitment being fully reflected on the balance sheet (as a liability), or results in the collateral arrangement being fully reflected in the profit and loss statement, there should be no need to apply an ad-hoc prudential treatment to mitigate the procyclical effects.

Where, in contrast, the accounting treatment results in the payment commitment and the collateral arrangement remaining off balance sheet, within the supervisory review and evaluation process (SREP), competent authorities should assess the risks to which the capital and liquidity positions of a credit institution would be exposed, should the DGS call this institution to pay its commitment in cash, and exercise the appropriate powers to ensure that the procyclicality effect is mitigated by additional capital/liquidity requirements.