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Home > Prudential Regulation Authority > Pillar 2 liquidity – CP21/16
 

Pillar 2 liquidity – CP21/16

12 May 2016

Update 18 October 2016: The PRA published PRA statement on feedback received during the consultation period for CP21/16 ‘Pillar 2 liquidity’. This statement summarises the feedback received on the draft statement of policy, but does not provide final policy proposals. As noted in CP21/16, the PRA will publish a second consultation paper covering a range of risks outlined in CP21/16 (mid-2017 on current plans).

Background

In June 2015,  the Prudential Regulation Authority (PRA) restated its overall approach to liquidity and funding risks, taking into account the European Commission’s delegated act under EU Regulation 575/2013 with regard to the Liquidity Coverage Requirement (LCR) for credit institutions. That policy is available in Policy Statement 11/15 ‘ CRD IV Liquidity’ and Supervisory Statement (SS) 24/15 ‘The PRA’s approach to supervising liquidity and funding risks’ (see related links). The LCR is a Pillar 1 standard applicable across the European Union which took effect on 1 October 2015. In SS24/15 ‘, the PRA outlined an interim Pillar 2 approach, and indicated that it would further review its assessment framework at a later date.

In this consultation paper (CP), the PRA proposes a statement of policy on its approach to three aspects of Pillar 2 liquidity (‘Pillar 2’): intraday risk, debt buyback and non-margined derivatives. The CP also outlines the PRA’s Pillar 2 objectives and scope. In addition, it provides an early overview of planned future work to develop the Pillar 2 approach where the PRA is not yet setting out proposals. As such, this CP constitutes the first of two planned CPs on Pillar 2.

The PRA’s aim in publishing a first CP now is to:

  • seek specific feedback from firms on those elements where its thinking is advanced enough to make specific proposals; and
  • invite early views from industry on key future elements of the regime where it is not yet ready to make specific proposals.


The implementation of the entire Pillar 2 regime will only take place once all individual elements have been consulted on and the PRA has published its final approach following the second CP on Pillar 2.

Summary of proposals

The specific proposals on which the PRA seek feedback from firms are that:

  • in general, the level of application for setting requirements under Pillar 2 will be aligned to the Pillar 1 approach;
  • that in disclosing information about their liquidity position, firms should note that their publically disclosed Liquidity Coverage Ratios (LCRs) include high quality liquid assets (HQLA) required to cover Pillar 2 risks, with no further specific disclosure on their Pillar 2 requirements unless required by law;
  • the PRA’s approach to assessing liquidity risk associated with debt buyback and non-margined derivatives will be based on supervisory discretion guided by the firm’s outstanding debt or exposures; and
  • the PRA’s approach to assessing intraday liquidity risk will be based on the firm’s maximum net debits, the firm’s stress testing framework, the firm’s key characteristics such as whether it is a direct or indirect participant in payment and settlement systems, and the markets it operates in.


Responses

This consultation closed on Friday 12 August 2016. Please address any comments or enquiries to CP21_16@bankofengland.co.uk.

Consultation paper

Pillar 2 liquidity – CP21/16

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