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October 04, 2017

The PRA published a consultation paper CP19/17 on groups policy and double leverage for banks. The PRA has reviewed the groups policy framework, to ensure that it remains coherent and fit-for-purpose in light of the post-crisis financial reforms—including Basel III standards, UK ring-fencing legislation, the resolution framework, and other international developments. Following the review, the PRA is considering certain necessary changes to achieve its objective. The consultation closes on January 04, 2018.

This consultation paper makes proposals that require assessment and mitigation of the risks to group resilience due to the use of “double leverage.” Double leverage occurs when one or more parent entities in a group funds some of the capital in its subsidiaries by raising debt or lower forms of capital externally (Chapter 2). The proposals also require assessment and mitigation of the risks highlighted by prudential requirements applied by local regulatory authorities on overseas subsidiaries of UK consolidation groups (Chapter 2), along with improved monitoring of the distribution of financial resources across different group entities (Chapter 3). The PRA is also consulting elsewhere on a number of other policy proposals that refine the PRA’s framework for Groups Policy (summarized in Chapter 4). To implement these proposals, the PRA proposes to update:

  • Supervisory Statement SS31/15 “The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)”
  • Statement of Policy “The PRA’s methodologies for setting Pillar 2 capital”
  • SS24/15 “The PRA’s approach to supervising funding and liquidity risk”
  • Internal Capital Adequacy Assessment Part of the PRA Rulebook

CP19/17 is relevant to PRA-authorized UK banks, building societies, PRA-designated UK investment firms, and their qualifying parent undertakings, as well as credit institutions, investment firms, and financial institutions that are subsidiaries of these firms, regardless of their location. Once the proposals are finalized, the policy will be implemented fully from January 01, 2019. Where practical and applicable, firms should aim to incorporate the consultation proposals in their 2018 ICAAP/Individual Liquidity Adequacy Assessment Process (ILAAP) submissions ahead of full implementation. The PRA will keep its proposed approach and policy under review to assess whether any adjustments are required. The PRA will monitor the quality of information provided by firms in their ICAAPs/ILAAPs to ensure it is sufficient to meet the expectations set out in these proposals.

Related Link: CP19/17 on Groups Policy and Double Leverage (PDF)

Comment Due Date: January 04, 2018

Effective Date: January 01, 2019

Keywords: Europe, UK, Banking, Groups Policy, Double Leverage, CP19/17, ICAAP, ILAAP, SREP, PRA

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