PRA is proposing to update the Pillar 2A capital framework to take account of the additional resilience associated with higher macro-prudential buffer requirements in a standard risk environment. In this context, a key aspect of the proposal is to reduce variable Pillar 2A capital requirements. PRA proposes to apply the Pillar 2A reduction, where applicable, at the same time or before the 2% countercyclical capital buffer (CCyB) rate in UK comes into effect on December 16, 2020. This consultation closes on April 30, 2020. The proposed implementation date of the policy in the consultation paper is July 06, 2020.
The proposals in this consultation only relate to the Financial Policy Committee (FPC) decision of December 16, 2019, to raise the level of the UK CCyB rate that it expects to set in a standard risk environment from in the region of 1% to in the region of 2%. Any subsequent changes in the UK CCyB rate brought about by changes in the FPC's view of the prevailing risk environment would not be reflected in the changes in Pillar 2A. The proposals in this consultation paper would make amendments to supervisory statement (SS31/15) on the Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP). The proposals clarify the considerations related to macro-prudential buffers that PRA takes into account when it carries out an overall assessment of the level of capital that would be sufficient to ensure the sound management and coverage of the risks of firms.
This consultation is part of a package that includes review of the structural level and balance of capital requirements for the UK banking system undertaken by FPC; this includes the subsequent increase in the UK CCyB rate that FPC expects to set in a standard risk environment and the clarification of BoE that, in resolution, it expects all debt that is bailed in to be written down or converted to common equity tier 1 (CET1). The purpose of this package is to:
- Increase resilience—While leaving the overall loss-absorbing capacity for the banking system broadly unaffected, the changes would shift the balance of that capacity toward higher quality tier 1 capital.
- Improve responsiveness of capital requirements to economic conditions—By shifting the balance of capital requirements from minimum requirements that should be maintained at all times toward buffers that can be drawn down as needed, these changes would mean that banks would be more able to absorb losses while maintaining lending to the real economy through the cycle.
- Enhance resolvability—The intention of BoE, in resolution, to write down or convert debt to CET1 capital would make resolved banks more resilient to further losses, supporting their resolution and minimizing the wider economic costs of their failure.
The consultation paper is relevant to the PRA-authorized UK banks, building societies, and designated investment firms. The proposals have been designed in the context of the withdrawal of UK from EU and entry into the transition period, during which time the UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with EU take effect. PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018.
Comment Due Date: April 30, 2020
Effective Date: July 06, 2020
Keywords: Europe, UK, Banking, CCyB, Pillar 2A, ICAAP, SREP, CET1, Capital Framework, FPC, Macro-prudential Policy, Resolution Framework, BoE, PRA
Previous ArticlePRA Letter to Insurers With Outstanding EU Liabilities Post Brexit
The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.
The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.
The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.