PRA Issues Updates to Pillar 2A Capital Framework in UK
PRA published the policy statement PS15/20 to reflect additional resilience associated with higher macro-prudential buffers in a standard risk environment with a reduction in Pillar 2A capital requirements. Annex to PS15/20 contains the updated supervisory statement SS31/15 with the final PRA policy on Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP). The changes in PS15/20 become effective from the publication date—that is, July 06, 2020. PRA will apply the Pillar 2A reduction, where applicable, on or before December 16, 2020 and, for efficiency, align the assessment to related processes.
SS31/15 was updated to reflect the PRA policy to reduce variable Pillar 2A capital requirements to take account of the additional resilience associated with higher macro-prudential buffers in a standard risk environment. An update has been made to paragraph 5.12 to reflect that, when setting Pillar 2A, PRA will consider the level of capital that is necessary to capture risks to which the firm is or might be exposed and the extent to which those risks are mitigated by macro-prudential buffers. SS31/15 was also updated to correct minor typographical errors, simplify formatting and aid readability. In addition to the updated SS31/15, PS15/20 also presents feedback to responses to the consultation paper (CP2/20) on reconciling capital requirements and macro-prudential buffers. The 10 responses received to CP2/20 resulted in no changes to the proposals. The proposed reduction related to the Financial Policy Committee (FPC) decision, of December 16, 2019, to increase the UK countercyclical capital buffer (CCyB) rate that it expects to set in a standard risk environment from in the region of 1% to in the region of 2%. Any changes in the UK CCyB rate occasioned by the FPC’s view of the prevailing risk environment would not be reflected in Pillar 2A.
The policy presented in PS15/20 follows a review of the structural level and balance of capital requirements for the UK banking system undertaken by BoE, FPC, and the Prudential Regulation Committee (PRC). This includes the increase in the UK CCyB rate that FPC expects to set in a standard risk environment and the clarification of BoE that, in resolution, it expects all debt that is bailed in to be written down or converted to common equity tier 1 (CET1). In response to COVID-19 pandemic, FPC has reduced the UK CCyB rate to 0% of banks’ exposures to UK borrowers, with immediate effect. The rate had been 1% and had been due to reach 2% by December 2020. Active use of CCyB in this way can dampen economic shocks and help to reduce the size of economic downturns, thus allowing banks to maintain lending to households and businesses through the cycle. However, the structural UK CCyB rate set in a standard risk environment has not changed. Therefore, PRA considers that this policy to reduce Pillar 2A to reflect additional resilience associated with higher macro-prudential buffers in a standard risk environment maintains the resilience of banks and the banking system.
In light of the COVID-19 pandemic, PRA will temporarily increase the PRA buffer for all firms that receive a Pillar 2A reduction. PRA buffer will increase by 56% of the firm’s total Pillar 2A reduction until the UK CCyB rate begins to increase towards 2%. Use of the PRA buffer does not trigger any automatic distribution restrictions. Thus, the point at which the automatic distribution restrictions apply that are required by the Capital Requirements Directive (CRD) IV will decrease for firms receiving a Pillar 2A reduction. FPC expects to maintain the 0% rate for at least 12 months and any subsequent increase would not be expected to take effect until at least March 2022. In addition, the pace of return to a standard risk environment UK CCyB rate of in the region of 2% will take into account how far firms’ capital has been depleted through this period and thus the task to rebuild capital. PRA intends to review its Pillar 2A methodologies in more detail by 2024, in light of the changes in buffers and improvements in the way risk-weighted assets are measured following the finalization of Basel III.
Effective Date: July 06, 2020
Keywords: Europe, UK, Banking, CCyB, Pillar 2A, ICAAP, SREP, CET 1, Capital Framework, Macro-Prudential Policy, Resolution Framework, COVID-19, SS 31/15, PS 15/20, FPC, BoE, PRA
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