PRA published the consultation paper CP9/20 that proposes an approach to supervising the new and growing non-systemic UK banks. The proposals in this consultation constitute clarifications about the current supervisory approach of PRA, with the exception of proposed changes to the calculation of PRA buffer for new banks, and set out expectations for solvent wind-down plans. The comment period on CP9/20 closes on October 14, 2020, with PRA proposing that the expectations set out in this consultation take effect in the first half of 2021.
The proposals in CP9/20 are intended to help banks understand how and why PRA expectations increase as they grow and communicate the aim of PRA for banks to have positive regulatory relationships through open, constructive, and forward-looking communication. The proposals also clarify the expectations of a new and growing bank as it matures and that in a competitive environment it is normal to see both the entry and exit of banks. The proposals in CP9/20 would:
- Create a new supervisory statement on the approach of PRA to supervising new and growing non-systemic banks (Appendix 1)
- Provide reference to the new supervisory statement in paragraph 5.25 of Pillar 2 capital policy in SS31/15 on Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) (Appendix 2)
- Provide reference to the new supervisory statement in paragraph 9.45 of the Statement of Policy on methodologies of PRA for setting Pillar 2 capital (Appendix 3)
The PRA capital buffer is currently based on a wind-down cost calculation. In the experience of PRA, a number of banks have interpreted this inconsistently and taken different approaches to this calculation. In response, PRA is clarifying the purpose of the buffer and outlining a simpler approach to its calculation. PRA is proposing that the buffer for new banks will be calibrated to allow such banks time to find alternative sources of capital or make business model adjustments, in the event of a loss of investor support. In CP9/29, PRA is proposing that the new banks calculate their PRA capital buffer as six months of operating expenses. In CP9/20 and the draft supervisory statement, PRA explains why it is important for banks to have credible and comprehensive recovery and solvent wind-down plans, and to prepare for resolution. A series of conditions must be met before a bank is placed into resolution and these are detailed in chapter 5 of the draft supervisory statement (Appendix 1).
The proposals set out in CP9/20 have been designed in the context of withdrawal of UK from EU and entry into the transition period, during which time UK remains subject to the European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with EU take effect. PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018.
Comment Due Date: October 14, 2020
Effective Date: First Half of 2021 (Proposed)
Keywords: Europe, UK, Banking, Non-Systemic Banks, SREP, ICAAP, Regulatory Capital, Capital Buffer, CP9/20, Resolution Framework, Resolution Planning, Basel, PRA
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