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Home > Prudential Regulation Authority > Capital and liquidity
 

Capital and liquidity

This page sets out the PRA’s approach to capital and liquidity for the UK banking sector. Further information is available in the PRA’s approach to banking supervision.                  

Capital

As set out in the approach document, firms should maintain appropriate capital resources, both in terms of quantity and quality, consistent with their safety and soundness and taking into account the risks to which they are exposed. Having enough capital of sufficiently high quality reduces the risk of a firm becoming unable to meet the claims of its creditors, and is therefore crucial for maintaining their confidence, which is particularly important for deposit-takers and investment firms given their liabilities are of shorter maturity than their assets. In addition, where a firm is owned by private shareholders, having more shareholder equity — the highest-quality form of capital — gives owners a greater interest in the firm being run prudently.
 
Readers may also find it useful to refer to the PRA webpages on CRD IV and structural reform.
 

Quality and level of capital

As with all elements of its approach, the PRA expects firms in the first instance to take responsibility for ensuring that the capital they have is adequate. But reflecting the incentives firms have to run their business in a less prudent manner than the public interest would indicate, there is also a clear role for the PRA as prudential regulator to specify a minimum amount of capital for firms to hold. This does not however diminish the need for firms themselves to judge the adequacy of their capital position in an appropriately prudent manner, since that is necessary to maintain the confidence of their creditors. Firms should engage honestly and prudently in assessments of capital adequacy, not least because the PRA's limited resource means that it cannot be expected to identify and account for all the risks that firms may face.

Framework

For all banks, building societies and designated investment firms, the PRA determines a minimum regulatory capital level and a buffer on top of this expressed in terms of the Basel and EU risk-weighted framework. on 29 July 2015 the PRA published a package of policy on assessing the framework for Pillar 2 capital. The 'Pillar 2 framework - background' note provides more information on the components of capital, the buffers and a diagram showing the Pillar 2 capital framework.

 

Liquidity

Firms have to be able to meet their liabilities on an ongoing basis with sufficient confidence, including in stressed circumstances, consistent with their safety and soundness.
 
As with all elements of its approach, the PRA expects firms in the first instance to take responsibility for ensuring they are able to meet their liabilities with sufficient confidence.
 

Macroprudential objective - Financial Policy Committee 

Reflecting the importance of combining firm-specific supervision with oversight of the financial system as a whole, there is in addition a macroprudential objective in respect of capital maintained in aggregate by the banking system. This objective, and elements of macroprudential assessment more generally, for example top-down stress tests, fall under the purview of the Financial Policy Committee (FPC).
 
  • Quality and level of capital
  • Capital framework
  • Liquidity
Further information is available on the FPC webpages.
 

PRA publications

Readers can also find more information on capital and liquidity in the PRA Publications section of the website – see Related links. Select Banking policy publications, and click on the ‘Topic’ drop down and select ‘Capital’ or ‘Liquidity’.