Featured Product

    PRA Issues Updates to Pillar 2A Capital Framework in UK

    July 06, 2020

    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.


    Related Links

    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

    Featured Experts
    Related Articles

    FINMA Approves Merger of Credit Suisse and UBS

    The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.

    March 21, 2023 WebPage Regulatory News

    BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks

    The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.

    March 13, 2023 WebPage Regulatory News

    OSFI Finalizes on Climate Risk Guideline, Issues Other Updates

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.

    March 12, 2023 WebPage Regulatory News

    APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.

    March 07, 2023 WebPage Regulatory News

    BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending

    BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.

    March 03, 2023 WebPage Regulatory News

    HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks

    The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.

    March 02, 2023 WebPage Regulatory News

    BCBS Report Examines Impact of Basel III Framework for Banks

    The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.

    February 28, 2023 WebPage Regulatory News

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

    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.

    February 28, 2023 WebPage Regulatory News

    DNB Publishes Multiple Reporting Updates for Banks

    DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.

    February 28, 2023 WebPage Regulatory News

    NBB Sets Out Climate Risk Expectations, Issues Reporting Updates

    The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting

    February 24, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8798