Gareth Truran speaks at some conference.
Over the last year, the PRA has highlighted publicly on a number of occasions the risk that the MA specification may not have kept up with the changing nature of the market. The MA should only include the component of asset spreads that reflects compensation for risks to which firms are not exposed by virtue of being long-term investors. But it is possible that some of the returns which are currently treated as an illiquidity premium might, in fact, reflect compensation for variability around future credit losses. If so, in adverse scenarios, these profits might not materialise. Firms might be forced into recovery actions such as fire-sales of illiquid assets to manage solvency and meet policyholder commitments, reducing their ability to support sustainable long-term investment in the economy. As firms have invested in recent years in a much wider range of assets with different risk characteristics, the basis risk between these assets and the assets originally used to calibrate the MA has also increased.
So we think we need to look again at this issue, to be confident that the MA regime can safely support our ability to widen MA eligibility, encourage further expansion into new and innovative asset classes, and streamline our upfront review of firms’ MA applications.
Oh yes!