Featured Product

    BoE Statement on SRB and Pillar 2A in Stress Test Hurdle Rates

    July 12, 2018

    BoE published a statement providing details on two changes to the way hurdle rates are calculated in the annual stress test. These changes are only relevant to firms under the Capital Requirements Regulation (CRR). In its document on the key elements of the 2018 stress test, which was published in March 2018, BoE had noted its intention to change the way hurdle rates are calculated in the annual stress test in four ways.

    The two changes on which the statement provides details are as follows:

    • Hurdle rates will incorporate buffers to capture domestic systemic importance as well as global systemic importance.
    • The calculation of minimum capital requirements incorporated in the hurdle rates will more accurately reflect how they would evolve in a real stress.

    The Systemic Risk Buffer (SRB) increases the capacity of certain UK systemic banks to absorb stress, reflecting their significance for the domestic economy. Beginning in 2019, SRB rates will be set for ring-fenced banks (RFB) and large building societies by PRA. For the purpose of the 2018 stress test, in calculating these uplifts to firms’ hurdle rates, PRA will assume the following SRB rates for the SRB institutions: 1% for Barclays, 1% for HSBC, 2.5% for Lloyds Banking Group, 1% for Nationwide, 1.5% for RBS, and 1% for Santander UK. These are assumed rates for the concurrent stress-test purposes only. Actual SRB rates for affected firms will be determined and published for the first time in 2019.

    The annual stress test uses a risk-weighted hurdle rate, including Pillar 2A, which is a minimum capital requirement applied to cover a range of risks not (or not adequately) captured in Pillar 1. In the previous stress tests, the Pillar 2A element of the hurdle rate had been set as a constant share of risk-weighted assets over the five-year stress horizon. To ensure that the Pillar 2A requirements in the 2018 stress test more closely reflect the probable impact of stress on the risks captured in Pillar 2A, the Prudential Regulation Committee (PRC) has developed an approach in which each Pillar 2A risk component scales with a simple metric. This approach will preserve the current simplicity in the calculation of hurdle rates. These scaling bases are not intended to be forward guidance on how PRA will set Pillar 2A requirements in such a scenario; rather, they provide a simple way to ensure Pillar 2A requirements in the stress test more closely reflect the probable impact of the stress on the risks captured in Pillar 2A.

     

    Related Links

    Keywords: Europe, UK, Banking, Systemic Risk Buffer, Pillar 2A, Stress Testing, Stress Test 2018, Hurdle Rates, BoE

    Featured Experts
    Related Articles
    News

    EU Amends IFRS 9 Rule, Changes Concern Interest Rate Benchmark Reforms

    EU published Regulation 2020/34 regarding the International Accounting Standard (IAS) 39 and International Financial Reporting Standards (IFRS) 7 and 9.

    January 16, 2020 WebPage Regulatory News
    News

    FDIC and OCC Issue Statement on Heightened Cyber Security Risk

    In response to the heightened cyber-security risk facing the financial services industry and other critical business sectors, FDIC and OCC issued an interagency statement on heightened cyber-security risk.

    January 16, 2020 WebPage Regulatory News
    News

    BoE and FCA Outline Next Steps for LIBOR Transition in 2020

    BoE, FCA, and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have published a set of documents that outline the LIBOR transition priorities and milestones for 2020.

    January 16, 2020 WebPage Regulatory News
    News

    BCRA Updates Regulation on Capital Requirements and Information Regime

    BCRA updated the rules on minimum capital requirements for financial entities and on certain aspects of the information transparency regime for quarterly and annual supervision.

    January 16, 2020 WebPage Regulatory News
    News

    BIS to Expand Central Bank Membership

    BIS is to expand its central bank membership base and to increase collaboration in its work as a forum for international cooperation and as a hub for central banks and other financial authorities.

    January 14, 2020 WebPage Regulatory News
    News

    EIOPA Issues Technical Specifications for Market and Credit Risk Study

    EIOPA published the technical specifications, including instructions, for the market and credit risk modeling comparative study for year-end 2019.

    January 13, 2020 WebPage Regulatory News
    News

    FED Publishes FAQs on Tailoring Rules for Banks

    FED released a letter announcing the publication of an initial set of frequently asked questions (FAQs) in response to questions from institutions.

    January 13, 2020 WebPage Regulatory News
    News

    IA of Hong Kong Publishes Stress Testing Scenarios in Relation to ORSA

    IA of Hong Kong published the prescribed scenarios for stress and scenario testing to be used by the authorized insurers conducting general insurance business.

    January 13, 2020 WebPage Regulatory News
    News

    FDIC Letter on Submission of Call Reports by End of January 2020

    FDIC, in a letter to financial institutions, announced that the Consolidated Reports of Condition and Income (Call Reports) for the December 31, 2019 report date must be submitted to the Central Data Repository of the relevant US agencies by January 30, 2020.

    January 13, 2020 WebPage Regulatory News
    News

    EBA Consults on Calculation of Own Funds Requirements for Market Risk

    EBA is consulting on the draft regulatory technical standards for calculation of the own funds requirements for market risk, under the standardized and internal model approaches of the Fundamental Review of the Trading Book (FRTB) framework.

    January 13, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 4489