PRA Finalizes Approach to Supervision of International Banks
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations. This means that green gilts will be eligible for purchase in line with the existing operating procedures and consolidated market notice and for purchase as part of the Sterling Bond Portfolio and as collateral in the market operations. The Prudential Regulation Authority (PRA) published the policy statement PS19/21 on the approach for 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. PS19/21 contains feedback to responses to the consultation paper CP2/21 and the final supervisory statement SS5/21, which replaces SS1/18 and becomes effective on July 26, 2021.
SS5/21 sets out the expectations for receiving information concerning the risks in the wider group and co-operation from other supervisory authorities concerned with the firm or its wider group. This is necessary for PRA to be satisfied that the international bank is meeting threshold conditions, particularly the threshold condition concerning the effective supervision of the firm. SS5/21 also sets out expectations from international banks in meeting the threshold condition on the prudent conduct of business, including their systems and controls and risk management. After considering the responses received to CP2/21, PRA has made changes to SS5/21 to:
- Clarify that it will take a proportionate approach to implementation and to introduce an expectation for firms to provide PRA with a clear explanation of any gaps they need to address to comply with the expectations
- Further explain the scope of SS5/21 and its application to UK branches and UK subsidiaries
- Explain that where it identifies concerns that a branch would fail to meet its expectations for effective supervision, PRA may exercise its powers under the Financial Services and Markets Act 2000 (FSMA) to apply specific regulatory requirements at branch level
- Explain the expectation that international banks understand the extent of the services they provide to external end-users in the UK and the risks they pose to firms’ safety and soundness or the financial stability of the UK in certain circumstances
- Clarify the expectations on operational resilience arrangements for UK branches
- Explain the process it will adopt to obtain group information and clarify that it will take a tailored approach to each group in light of the relevant factors and circumstances
- Clarify that information expectations are proportionate, tailored to a firm’s activities, and focused on risks that have a direct impact on the PRA objectives;
- Clarify that daily or weekly profit and loss data is only required in respect of global and local investment banking and trading business lines for branches and subsidiaries that have the most potential impact on UK financial stability
- Clarify that, for the smallest firms, it will seek to obtain the most information from the home state supervisor
- Include examples of the circumstances in which it expects individuals to be approved as a Group Entity Senior Manager
- Explain the stages of the booking lifecycle that are within the scope of its expectations
- Clarify the approach to ensuring that controls exist from end-to-end trading book and banking book risks
- Further clarify how the Resolvability Assessment Framework applies to subsidiaries and branches
- Improve readability and increase overall clarity of expectations through minor amendments
The expectations in SS5/21 aim to ensure, among others, that PRA has access to appropriate information on the international bank, including visibility on group risks, to assess the impact that the firm’s activities may have on the stability of the UK financial system and the safety and soundness of the firm’s UK operations. The policy set out in PS19/21 has been designed in the context of the Brexit 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.
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Keywords: Europe, UK, Banking, Green Gilt, Sustainable Finance, ESG, PS19/21, CP2/21, SS5/21, Systemic Risk, Foreign Banks, FSMA, Resolution Framework, PRA, BoE
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