PRA proposed (in CP2/21) an approach to supervising the UK activities of PRA-authorized banks and designated investment firms that are either headquartered outside the UK or are part of a group based outside the UK. CP2/21 refers to such firms as “international banks.” PRA also proposed expectations for receiving information about risks in the wider group and for co-operation from regulated entities and their supervisors with intention to ensure that firms are meeting threshold conditions. The implementation date for the final policy is proposed to be in the second quarter of 2021 and the feedback period on the consultation ends on April 11, 2021. David Bailey of BoE, in his speech on the PRA approach to supervising international banks, highlighted that the regulator is open to international banks operating in the UK, but they will face the same robust regulation as the other financial service firms in the jurisdiction.
CP2/21 proposed the arrangements that PRA would expect to be in place to be able to effectively supervise international banks. The proposals would result in a new supervisory statement on approach to branch and subsidiary supervision of international banks (Appendix of CP2/21), which will supersede SS1/18 on the approach to branch authorization and supervision of international banks. The proposed expectations on subsidiaries and systemic wholesale branches in the proposed supervisory statement are consistent with the existing supervisory approach of PRA and are intended to provide clarity to firms on what they need to do to meet the PRA threshold conditions. CP2/21 proposed that certain factors would be relevant when considering an international bank’s compliance with threshold conditions, taking into account its membership of a group, its potential impact on UK financial stability, and the degree of integration between operations inside and outside the UK.
The expectations of PRA for the information that it requires to effectively supervise a firm vary according to the way in which such a firm’s affairs are integrated or separated from the rest of the group. Consequently, the proposed supervisory statement describes the expectations of PRA for the appropriate degree of separation and controls around the firm’s governance and independent risk management in different circumstances. Although the proposed supervisory statement largely consolidates the existing approach to international banks, PRA recognizes that firms operating with deemed authorizations under the temporary permissions regime may need additional time to adjust. Accordingly, it is proposed that such firms will not need to meet the expectations in the proposed supervisory statement immediately, but will need to do so as soon as practicable and in any event by the time they are authorized by PRA and exit the temporary permissions regime. As part of pre-authorization discussions, PRA proposed that such firms demonstrate how they intend to meet these expectations.
These proposals aim to provide clarity to international banks on the implications, for them, of the different ways they may choose to structure their operations. The proposals also aim to explain how PRA would assess such firms against its threshold conditions, particularly the condition related to the effective supervision of firms when a firm belongs to a group based outside the UK. Overall, the approach of PRA to the supervision of international banks remains stable and consistent following the withdrawal of UK from EU. The proposals have been designed in the context of the UK having left EU and the transition period having come to an end. Unless otherwise stated, any references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework.
Comment Due Date: April 11, 2021
Keywords: Europe, UK, Banking, CP2/21, Governance, Proportionality, Systemic Risk, Threshold Conditions, Foreign Banks, PRA
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Previous ArticleOSFI Consults on Addressing Climate Risks in Financial Sector
The Network for Greening the Financial System (NGFS) launched its first user feedback survey on climate scenarios, with the feedback period ending on February 27, 2023.
The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.