PRA Announces Additional Measures in Response to COVID-19 Outbreak
The Financial Policy Committee (FPC) of BoE met to review developments in the financial sector amid the COVID-19 crisis. PRA, with support from FPC, decided to maintain firms' systemic risk buffer at the rates set in December 2019, in response to the economic shock from COVID-19 pandemic. The systemic risk buffer rates will be reassessed in December 2021. The decision is relevant only to ring-fenced banks (RFBs) and large building societies subject to the systemic risk buffer. Additionally, in response to the COVID-19 outbreak, PRA published a modification by consent of the calculation of the total exposure measure of the leverage ratio. PRA also updated its statement on COVID-19 regulatory reporting and disclosure amendments to extend the deadline of two additional returns—credit risk return under the supervisory benchmarking exercise and high earners report (REP005).
FPC Statement
FPC usually assesses risks to UK financial stability and the resilience of the UK financial system and publishes that assessment in biannual Financial Stability Reports. Given the material developments in recent weeks, FPC decided to supplement its normal practice with an additional interim Financial Stability Report. That interim Report will be published on May 07, 2020. The interim Report will contain an assessment of the risks to UK financial stability and the resilience of the UK financial system to ongoing economic and market shocks. The assessment will, among others, draw on evidence from recent weeks and reflect the unprecedented actions taken to help alleviate the severe cash flow problems facing households and corporates over this period. The Committee also emphasized that, with tier 1 capital levels more than three times higher than at the start of the global financial crisis, major UK banks have shown, in repeated stress tests, their ability to absorb very severe market shocks by using their capital buffers.
Decision on Systemic Risk Buffer Rates
In December 2021, PRA expects to set an systemic risk buffer rate consistent with its statement of policy and the FPC framework. In doing so, PRA will take account of the evolution in firms’ balance sheets in response to COVID-19 and the extent to which they are temporarily inflated. Any decision on systemic risk buffer rates taken in December 2021 would take effect from January 2023. This decision applies to the Capital Requirements Directive (CRD) IV systemic risk buffer and any successor buffer that could be implemented following the adoption of CRD5. The Prudential Regulation Committee (PRC) and FPC also reiterate their expectation that all elements of banks’ capital and liquidity buffers can be drawn down as necessary to support the economy through this temporary shock.
Modification by Consent of Calculation of Total Exposure Measure of Leverage Ratio
PRA notes that firms may calculate their exposure value of regular-way purchases and sales awaiting settlement in line with Article 429g of Capital Requirements Regulation (CRR) 2. PRA is offering a modification by consent so that banks subject to the UK Leverage Ratio would be required to apply this article, for the purpose of PRA rules, if they choose to do so. The statement on modification is relevant to firms subject to the Leverage Ratio Part of the PRA Rulebook. PRA has released a draft Direction addressing the modification to Leverage Ratio Reporting and Public Disclosure rules that provide that the quarterly average figures, to be disclosed or reported for the quarter in which the modification first applied, shall reflect the modification as if it had applied on each day of the quarter.
Related Links
- FPC Statement
- Decision on Systemic Risk Buffer Rates
- Modification by Consent Regarding Leverage Ratio (PDF)
- Overview of Waivers and Modifications of Rules
- COVID-19 Regulatory Reporting and Disclosure Amendments
Keywords: Europe, UK, Banking, COVID-19, Reporting, Systemic Risk Buffer, Leverage Ratio, Credit Risk, Supervisory Benchmarking, PRA Rulebook, FPC, CRD, CRR, Ring Fencing, PRA
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