BoE and PRA announced changes to the resolution measures with the aim of alleviating operational burden on regulated firms in response to the COVID-19 outbreak. The changes to resolution measures relate to the resolvability assessment framework, valuation in resolution, and resolution plan reporting. Additionally, PRA issued a statement on setting Pillar 2A requirements as a nominal amount, instead of as a percentage of total risk-weighted assets (RWAs). BoE also provided an update for firms on the minimum requirement for own funds and eligible liabilities (MREL). The 2021 MRELs will reflect the policy changes to Pillar 2A capital-setting.
Changes to Resolution Measures
- Resolvability Assessment Framework—The dates for the major UK banks and building societies to submit their first reports on their preparations for resolution and publicly disclose a summary of these reports have been extended by a year. These firms will now be required to submit their first reports to PRA by October 2021 and make public disclosures by June 2022. BoE will also make its first public statement on these firms’ resolvability by June 2022. In due course, PRA intends to consult on changes to the Resolution Assessment Rules.
- Valuation in Resolution—The compliance deadline for the Statement of Policy on valuation capabilities to support resolvability has been extended by three months, to April 01, 2021. The deadline for firms to implement other Statements of Policy relevant to resolvability remains January 01, 2022.
- Resolution Plan Reporting—Firms will not be required to submit certain resolution pack information under the PRA supervisory statement (SS19/13) on resolution planning until the end of 2022, unless notified otherwise on an individual basis by PRA. This is an extension to the existing delay to resolution pack submissions that had been due to expire at the end of 2020 and now applies to a wider range of firms.
Statement on Conversion of Pillar 2A Capital Requirements
PRA is alleviating unwarranted pressure on firms by setting all Pillar 2A requirements as a nominal amount, instead of a percentage of total RWAs. Consistent with the BoE approach to stress testing, PRA does not believe that RWAs are a good approximation for the evolution of risks captured in Pillar 2A in a stress. PRA will continue to regularly assess the appropriate level of Pillar 2A; given these regular assessments, PRA believes the most proportionate approach is to set Pillar 2A as a nominal amount between assessments. This would reduce Pillar 2A as well as the threshold at which firms are subject to maximum distributable amount (MDA) restrictions, as a share of a firm’s RWAs in the capital stack if RWAs increase.
PRA will set Pillar 2A as a nominal amount in the 2020 and 2021 Supervisory Review and Evaluation Processes (SREPs). Firms with an SREP in 2020 do not need to apply for a variation to their Pillar 2A requirements. PRA invites all firms who do not have an SREP assessment due in 2020 to apply for a conversion of their current Pillar 2A requirement into a nominal amount using RWAs as of end-December 2019. This change is voluntary, subject to supervisory agreement, and would apply until the firm’s next regularly scheduled SREP. Where the PRA judges that RWAs are a more accurate reflection of a firm’s risks between assessments, it may reject the application.
Update on MREL
BoE will continue to keep MRELs under review and monitor market developments carefully in the third quarter of this year to inform its approach in the fourth quarter of 2020 to setting January 2021 MRELs and indicative January 2022 MRELs. In addition, BoE clarified that it intends to exercise its discretion with respect to the transition time firms are given to meet higher MRELs. Firms not currently subject to a leverage-based capital requirement, but which subsequently become subject to one, will be given at least 36 months after that requirement takes effect to meet the higher MREL resulting from it.
Keywords: Europe, UK, Banking, COVID-19, Resolution Planning, Reporting, Resolution Plan, Pillar 2A, Capital Requirements, Risk-Weighted Assets, Resolvability Assessment Framework, MREL, SREP, Deadline Extension, BoE, PRA
ESG and climate expert for P&C insurance; IFRS 17 specialist and chartered accountant; extensive experience in both life and non-life insurance, with focus on capital management, financial performance, and financial reporting.
Previous ArticleUS Agencies Issue Policy Statement on Allowance for Credit Losses
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.