PRA and FPC Propose Changes to Leverage Ratio Framework in UK
PRA published CP14/21, which contains two consultations on the leverage ratio framework: one from the Financial Policy Committee (FPC) and the other from PRA. Post review of the existing framework, FPC has proposed changes to the framework while PRA has proposed an approach to implementing these changes. Both PRA and FCA have reviewed the existing framework in light of the revised international standards, with PRA having coordinated with FPC on this review. PRA also published draft updates to reporting and disclosure templates, along with the associated instructions. The comment period for CP14/21 closes on August 24, 2021. This consultation is relevant to all Capital Requirements Regulation (CRR) firms and CRR consolidation entities on an individual, consolidated, and where relevant, sub-consolidated basis.
FPC Proposals
The existing UK leverage ratio framework requires major banks and building societies to satisfy a minimum Tier 1 leverage ratio of 3.25% on a measure of exposures that excludes qualifying central bank reserves. Mirroring the risk-weighted capital framework, three-quarters of this minimum requirement must be met with Common Equity Tier 1 (CET1) capital instruments. The remaining additional Tier 1 capital instruments must have a conversion trigger of at least 7% of risk-weighted CET1 capital to count toward the leverage ratio minimum requirement. The UK leverage ratio framework also includes regulatory buffers that must be met only with CET1: an additional leverage ratio buffer for systemically important banks and a countercyclical leverage ratio buffer. FPC proposes that PRA should implement and extend these measures in relation to the following firms (each a ‘relevant firm’): each major UK bank, building society, or investment firm; each UK bank, building society, or investment firm with significant non-UK assets; and holding companies approved or designated by the PRA with consolidated situations (including where that holding company is part of a ring-fenced body sub-group, the consolidated situation of that sub-group) comparable to any other relevant firm. The PRA consultation proposes quantitative thresholds that would be used to capture those relevant firms.
Subject to Parliament approving the MPM Order 2021, FPC proposes to direct (rather than recommend) that the PRA implement these measures. MPM Order 2021 refers to the June 14, 2021 the secondary legislation (the Bank of England Act 1998 (Macro prudential Measures) (Amendment)) Order 2021) that is intended to align the FPC power of direction with changes made under the Financial Services Act 2021. The proposed direction of FPC would specify at which levels of application the leverage ratio would be applied, while leaving certain aspects of the level of application to the discretion of PRA. The leverage ratio requirement would apply to UK consolidated groups and ring-fenced body sub-groups. In addition, for firms below the top level of those groups, the requirement would also apply on an individual basis, with PRA discretion to apply at a sub-consolidated basis. In continuation of the current approach, FPC proposes to recommend to the PRA to require that additional Tier 1 capital should have a conversion trigger of at least 7% of risk-weighted CET1 capital to count toward the minimum leverage ratio requirement. FPC notes and welcomes the proposed approach of PRA in its concurrent consultation for updating its supervisory expectation for all firms, which helps to prevent excessive system-wide leverage. FPC also notes and welcomes the proposed approach of PRA to implementing Basel III changes to the leverage exposure measure or LEM.
PRA Proposals
The PRA consultation sets out proposals for implementing the changes proposed by FPC to the UK leverage ratio framework, should they be adopted by FPC after consultation. The PRA proposals aim to ensure that the leverage ratio framework is updated to reflect changes in international standards and the evolution of risks to the UK financial system. The PRA proposes new rules that would replace the existing CRR in respect of the leverage ratio in the UK. It also proposes to amend the existing rules of PRA on the leverage ratio and the Supervisory Statement SS45/15 on the UK leverage ratio framework. Additionally, PRA proposes to make consequential amendments to the leverage ratio model requirements covering the additional global systemically important institutions (G-SII) and other systemically important institutions (O-SII) leverage ratio buffers as well as to other reporting and disclosure requirements referencing the leverage ratio. PRA proposes to comply with the direction and recommendation of FPC by amending the existing PRA rules on the leverage ratio:
- from January 01, 2022, where the leverage ratio capital requirement is applied on a consolidated basis, to make the CRR consolidation entity responsible for ensuring compliance with the consolidated capital requirement
- from January 01, 2022, to clarify that firms can use permissions granted to firms under Article 9(1) of the CRR, for the purposes of meeting the leverage ratio capital requirement on an individual basis
- from January 01, 2023, to apply a leverage ratio capital requirement not only to all firms with retail deposits equal to or greater than £50 billion, but also to all firms with non-UK assets equal to or greater than GBP 10 billion (calculated on an individual, consolidated, and sub-consolidated basis as applicable)
- from January 01, 2023, to apply the leverage ratio requirement on an individual basis to any firm that is not a CRR consolidation entity or a ring-fenced body that is the ultimate parent within a ring-fenced body sub-group; on a consolidated basis to CRR consolidation entities; and on an ring-fenced body sub-consolidated basis to ring-fenced sub-groups. The PRA proposes to make sub-consolidation available as an alternative to individual application where a firm has subsidiaries that can be consolidated, subject to a firm’s application and a firm meeting certain conditions set out in this consultation.
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Comment Due Date: August 24, 2021
Keywords: Europe, UK, Banking, Leverage Ratio, CRR, CP14/21, Basel, Leverage Exposure Measure, G-SII, O-SII, Reporting, Disclosures, Regulatory Capital, FPC, PRA
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