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    PRA Issues Statement on Capital Arbitrage Transactions

    April 13, 2022

    The Prudential Regulatory Authority (PRA) issued an update with respect to the approach on capital arbitrage transactions and the strengthening accountability regime.

    In the statement capital arbitrage transactions, PRA states that in line with the Basel Committee on Banking Standards (BCBS) statement of June 02, 2016, firms should not engage in transactions with the aim of offsetting regulatory adjustments. Such transactions pose a number of risks, including legal risk, and are untested in their ability to fully address the underlying rationale for the regulatory adjustment. Furthermore, such transactions can have the effect of overestimating eligible capital or reducing capital requirements, without commensurately reducing the risk in the financial system, thus undermining the calibration of minimum regulatory capital requirements. PRA emphasized and urged firms to strictly follow its policies and approach to banking supervision. PRA also highlights that it will carefully scrutinize transactions in light of the principles, rules, and expectations, including any transactions that would allow firms to avoid regulatory capital deductions under Article 36(1) of the Capital Requirements Regulation (CRR).

    In addition, PRA has updated the inventory of senior manager responsibilities to include references made to senior manager responsibilities in its publications (since December 2021). The updated list does not replace or amend any PRA publication nor remove the need to review relevant PRA publications. Stakeholders should continue to refer to the original publications or the PRA Rulebook and should not regard the inventory as an exhaustive list. The strengthening accountability regimes for banking and insurance help to support a change in culture at all levels in firms through a clear identification and allocation of responsibilities to individuals responsible for running them.

     

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    Keywords: Europe, UK, Banking, Basel, Regulatory Capital, BCBS, Capital Arbitrage Transactions, CRR, PRA Rulebook, Accountability Regime, Operational Risk, PRA

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