UK Regulators Issue CRR Changes and Stress Test Scenarios for Banks
The Prudential Regulation Authority (PRA) issued the policy statement PS8/22 to amend the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook and update the supervisory statement SS7/13 titled "Definition of capital (CRR firms)." PS8/22 also provides feedback to the consultation (CP2/22) that had proposed such amendments, with the finalized changes slated to come into effect on January 01, 2023. Moreover, the Bank of England (BoE) published the annual cyclical scenario (ACS) for stress testing banks in 2022, in addition to the key elements, guidance, variable paths, and the traded risk scenario for the stress test. Also published were the data templates and taxonomy for the concurrent stress testing exercise for 2022.
With regard to the CRR-related changes, post the consultation process (CP2/22), PRA decided to amend the proposed rules to align the General Prior Permission deduction requirement with the existing approach for reductions in capital instruments. Under this approach, the deduction would only need to be recognized when the transaction is expected to take place with sufficient certainty. Consequently, PRA has updated the SS at paragraph 10.3 with an expectation that firms notify PRA every quarter regarding transactions taken under the General Prior Permission, to ensure transactions are within the predetermined General Prior Permission amount. During the approval process, PRA would assess the current and forecast capital adequacy of the firm following a reduction transaction; the timing of deduction would not affect this assessment. In addition, the instruments will remain available to absorb losses until there is sufficient certainty that the transaction will take place. This is the key deviation PRA has introduced from the proposed policy in CP2/22.
Among the recent PRA stress test publications is the annual cyclical scenario (ACS) that PRA will use for the 2022 stress test of the UK banking system. The exercise subjects the major UK banks to hypothetical deep simultaneous recessions in the UK and global economies, large falls in asset prices and higher global interest rates, and a separate stress of misconduct costs. The eight participating banks and building societies for this stress test exercise are Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest Group, Santander UK, Standard Chartered, and Virgin Money UK. The ring-fenced subgroups of Barclays, HSBC, Lloyds Banking Group, and NatWest Group will also be assessed on a standalone basis for the first time. The scenario will cover a five-year horizon using the end of June 2022 as the starting point. Also issued are the instructions for submission of data, as outlined in the Stress Test Data Framework, or STDF, manual for the reporting of stress-test data that was communicated to all banks in January 2022. These instructions need to be followed for both structured and unstructured data requests. The projections data requested (structured and unstructured) should be submitted to BoE by January 11, 2023. Results will be published in the Summer of 2023 and will be used to help inform capital buffers of banks.
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Keywords: Europe, UK, Banking, Basel, Regulatory Capital, Stress Testing, CRR, CP2 22, PS8 22, SS7 13, PRA Rulebook, Annual Cyclical Scenario, BoE, PRA
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