Pillar 2A capital requirements and disclosure

Policy Statement 30/17 | Consultation Paper 12/17

Published on 12 December 2017

Overview

This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to Consultation Paper (CP) 12/17 ‘Pillar 2A requirements and disclosure’.

It sets out final amendments to Supervisory Statement (SS) 31/15 ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)’ (Appendix 1), and Statement of Policy (SoP) ‘The PRA’s methodologies for setting Pillar 2 capital’ (Appendix 2), intended to provide additional clarity and transparency on the PRA’s Pillar 2A framework.

This PS is relevant to banks, building societies and PRA-designated investment firms.

In CP12/17 the PRA proposed to:

set Pillar 2A capital as a firm-specific capital requirement under section 55M of the Financial Services and Markets Act 2000 (FSMA), rather than as individual guidance
update existing capital terminology, in particular to introduce the term ‘Total Capital Requirement’ (TCR) to refer to the amount and quality of capital a firm must maintain to comply with the minimum capital requirements under the Capital Requirements Regulation (575/2013) (CRR) (Pillar1) and the Pillar 2A capital requirement
revise the PRA’s Pillar 2A disclosure policy, introducing an expectation that firms disclose their TCR or, where a Pillar 2A capital requirement has not yet been set, total Pillar 1 and Pillar 2A guidance
provide clarity on when and how individual Pillar 2A capital requirements may be set.

As a result of feedback, the PRA has made a minor change to the draft SS to the TCR disclosure expectation for sub-consolidated ring-fenced bodies (RFBs). This change clarifies that the disclosure expectation for RFBs applies only at the sub-consolidated group level, where one has been set up, and not at subsidiary or individual (solo) level. Minor further corrections to the SS and SoP have been made to reflect the change of terminology from individual capital guidance (ICG) to TCR, and minor linguistic corrections.

Implementation

These changes will take effect from 1 January 2018.

From 1 January 2018, after a SREP firms will still be invited to apply for Voluntary Requirement (VREQ) to set their Pillar 2A capital. However, the text of the VREQ will be amended slightly to clarify that Pillar 2A is now a requirement. Firms will also be invited to simultaneously apply for a waiver by consent. This waiver will be introduced to ensure there is no confusion over the fact Maximum Distributable Amount trigger points include Pillar 2A, as set via the VREQ. Both the updated VREQ and the waiver by consent will be available on Waivers and Modifications of rules in due course.

Policy Statement 30/17

Appendices

SS31/15 UPDATE 'The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)'

Statement of Policy UPDATE ‘The PRA’s methodologies for setting Pillar 2 capital’

Published 12 July 2017

Overview

This consultation paper (CP) sets out proposed adjustments to the Prudential Regulation Authority’s (PRA) Pillar 2A capital framework. It is relevant to all banks, building societies and PRA-designated investment firms.

This CP sets out proposals to change Supervisory Statement (SS) 31/15 ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)’ and the Statement of Policy (SoP) ‘The PRA’s methodologies for setting Pillar 2 capital’.

The PRA proposes to set Pillar 2A capital as a firm-specific capital requirement under section 55M of the Financial Services and Markets Act 2000 (‘the Act’), rather than as individual guidance. Consistent with the PRA’s current policy, under this proposal the requirement would be set at the level and quality of capital the PRA considers a firm should maintain, in addition to Pillar 1, to meet the overall financial adequacy rule.

In implementing these proposals, the PRA intends to update some of the existing capital terminology. The term ‘Total Capital Requirements’ (TCR) is introduced to refer to the amount and quality of capital a firm must maintain to comply with the Capital Requirements Regulation (575/2013) (CRR) (Pillar 1) and the Pillar 2A capital requirement. The term ‘Individual Capital Guidance’ (ICG) will be discontinued.

The PRA also proposes a revised disclosure policy in which the PRA expects firms to disclose their TCR or, where a Pillar 2A capital requirement has not yet been set, total Pillar 1 and Pillar 2A guidance.

Finally, the PRA also proposes to provide clarity on when and how individual (solo) Pillar 2 capital requirements may be set.

The purpose of these proposals is to bring greater clarity, consistency and transparency to the PRA’s capital setting approach. In promoting a greater level of transparency and disclosure, the PRA seeks to promote financial stability, the safety and soundness of PRA-authorised firms, and facilitate more informed and effective competition in the banking sector.