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    PRA Consults on Prudential Rules for "Simpler-Regime" Firms

    February 28, 2023

    Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms. PRA is also seeking comments on the proposals for simplification of remuneration requirements for small banks and building societies. The consultation period for both proposals ends on May 30, 2023.

    The "strong and simple" initiative from PRA seeks to mitigate the complexity and simplify the prudential framework for small, domestic banks and building societies, while maintaining their resilience and reducing barriers to growth. PRA had earlier communicated its intent to split the development of the simpler regime into two phases, with Phase 1 to focus on non-capital-related prudential measures and Phase 2 to focus on capital-related prudential measures.  The consultation applies to authorized banks and building societies and prospective entities interested in, and currently applying for, authorization as a deposit-taker. The proposals set out in this consultation include:

    • new liquidity requirements for the application of the net stable funding ratio or NSFR
    • revisions to the application of Pillar 2 liquidity add-ons
    • a new streamlined Internal Liquidity Adequacy Assessment Process, or ILAAP, template
    • the removal of certain liquidity reporting templates, new Pillar 3 disclosure requirements for Simpler-regime Firms
    • simplifications to certain proportionality approaches currently applicable in the PRA Rulebook.

    PRA intends to consider possible further changes to liquidity reporting requirements as part of implementing the BoE plan for transforming data collection. The implementation date for the first phase of proposed simplifications would be in the early second half of 2024. PRA also proposes to make available the rule modification enabling eligible firms to become Simpler-regime Firms at least six months before the implementation date. With regard to Phase 2, PRA is making the planning assumption that the Basel 3.1 Pillar 1 approach to credit risk would be the starting point for designing the simpler-regime risk-based capital framework. In Phase 2, PRA intends to focus on simplifications to Pillar 2 and buffer requirements for Simpler-regime Firms and expects to consult on Phase 2 measures in the first half of 2024. Below are the highlights of the additional regulatory updates from the UK authorities:

    • An analysis published by the Bank of England (BoE) indicates that the proposed revisions to the standardized approach and the internal ratings-based approach (IRB) to credit risk are expected to narrow the gap between standardized approach and IRB risk-weights in the residential mortgage market. This should facilitate competition between firms and inform the PRA thinking in designing a simpler risk-based capital framework for small banks and building societies. 
    • Yet another update from the Financial Conduct Authority (FCA) sets out initial observations on implementation of the Investment Firms Prudential Regime (IFPR). FCA published initial observations on how firms are implementing requirements on the internal capital adequacy and risk assessment (ICARA) process and reporting under the IFPR. The review is focused on capital adequacy, liquidity adequacy, wind-down planning under the ICARA process, and the regulatory reporting. Overall, FCA found that most firms engaged well in the review and progress has been made in understanding the requirements. As a next step, FCA intends to publish a concluding report after completion of the review.
    • BoE published the Statistical Notice 2023/01, which addresses a new approach to managing data confidentiality across the BoE Data and Statistics Division that involves seeking prior approval from reporting institutions should the data they provide contribute to a published aggregate where there are less than three contributors. 


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    Keywords: Europe, UK, Banking, Basel, Regulatory Capital, Strong and Simple Framework, Reporting, NSFR, PRA Rulebook, Credit Risk, Residential Mortgage, Remuneration, Statistical Notice, IFPR, Investment Firms, PRA, BoE, FCA

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