Prudential Regulation Authority Rulebook

8.1

Chapter 4 of the PRA’s Definition of Capital rules states that firms must treat all CFCN as a holding of capital of the connected party and apply to it the treatment under the CRR applicable to such a holding. The CFCN rule applies on an ongoing basis. Therefore where a loan initially falls outside the definition of CFCN but later falls into it, the appropriate capital treatment should be applied immediately and the PRA should be notified. For example, if the initial lending to a connected party is subsequently downstreamed to another connected party, the relationship between the firm and the ultimate borrower may be such that, looking at the arrangements as a whole, the entity to which the firm lends is able to regard the loan as being capable of absorbing losses.

8.2

Firms should take account of contractual, structural, reputational or other factors when determining whether a transaction is a CFCN.

8.3

Lending to a connected party will not normally be considered CFCN where that party is acting as a vehicle to pass funding to an unconnected party and has no other creditors whose claims could be senior to those of the lender.

8.4

Additionally, for connected parties within the same consolidation group, it is likely that a loan is not CFCN if:

1. (a) it is secured by collateral that is eligible for the purposes of credit risk mitigation under the standardised approach to credit risk; or
2. (b) it is repayable on demand (and is treated as such for accounting purposes by the borrower and lender) and the firm can demonstrate that there are no potential obstacles to exercising the right to repay, whether contractual or otherwise.