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.
Related Links
Keywords: Europe, UK, Banking, Basel, Regulatory Capital, Stress Testing, CRR, CP2 22, PS8 22, SS7 13, PRA Rulebook, Annual Cyclical Scenario, BoE, PRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
Next Article
EBA Launches EU-Wide Transparency Exercise in 2022Related Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.