Published on 7 December 2015
Implementing a UK leverage ratio framework – PS27/15
On 1 July 2015, the Financial Policy Committee (FPC) directed the Prudential Regulation Authority (PRA) to implement a UK leverage ratio framework. On 10 July 2015 the PRA published Consultation Paper (CP) 24/15: ‘Implementing a UK leverage ratio framework’ setting out how the PRA intended to meet the FPC’s direction. This policy statement (PS) provides feedback to responses to the CP. It sets out the changes made to the rules and supervisory statements proposed in the CP. This PS is relevant to PRA-regulated banks and building societies with retail deposits equal to or greater than £50 billion on an individual or a consolidated basis.
The PRA considers that, in line with its statutory obligations, this framework will address the risk of excessive leverage for the group of firms that are the most systemically important in terms of size and critical services provided to the UK economy, whose individual failure could cause adverse effects on the stability of the UK financial system.
The PRA received nine written responses to the CP. In light of the responses received the PRA has chosen to extend the transition period for daily averaging disclosure requirements by 12 months.
Structure of the PS
This PS broadly follows the same chapter structure as the CP. Where relevant, each section includes:
- the approach taken on the most significant issues raised by respondents, in particular noting those areas where the PRA is making changes to the proposals contained in the CP; and
- clarification where the PRA considers it appropriate to use this PS to clarify issues of uncertainty raised in responses to the CP.
The appendices include links to final rules, one updated and two new supervisory statements, and templates for data items FSA083 and FSA084. Firms wishing to use XSD templates for reporting should get in touch with their usual supervisory contact.
Published on 10 July 2015
Implementing a UK leverage ratio framework - CP24/15
Background on CP24/15
On 1 July 2015, the Financial Policy Committee (FPC) directed the Prudential Regulation Authority (PRA) to implement a UK leverage ratio framework. This consultation sets out how the PRA intends to achieve this. It is proposed that firms in scope will be required to meet a minimum leverage ratio requirement and to consider whether they hold an amount of Common Equity Tier 1 that is greater than or equal to their countercyclical leverage ratio buffer (CCLB), and if the firm is a Global Systemically Important Institution (G-SII), their G-SII additional leverage ratio buffer (ALRB).
The consultation is relevant to PRA-regulated banks and building societies with consolidated retail deposits equal to or greater than £50 billion.
Summary of proposals
The consultation sets out the PRA’s proposed approach in relation to the implementation of a domestic leverage ratio framework and its key components, such as scope of application, minimum leverage ratio requirement, leverage ratio buffers, definitions and reporting and disclosure requirements.
To enable the framework to be fully effective in promoting safety and soundness of firms, the PRA proposes to require firms in scope to report and disclose an averaged leverage ratio by applying daily averaging to on-balance sheet exposures and monthly averaging to the capital measure and off-balance sheet exposures. The PRA proposes a transitional period of twelve months for firms to comply with the averaging requirement.
The PRA proposes that the framework should come into force on 1 January 2016.
The appendices in the CP set out:
- Appendix 1 – proposed rules on the UK minimum leverage ratio and buffers
- Appendix 2 – proposed rules on UK leverage ratio reporting
- Appendix 3 – proposed rules on UK leverage ratio disclosures
- Appendix 4 - a draft supervisory statement setting out the PRA’s expectations in relation to the application of the UK leverage ratio framework
- Appendix 5 - a draft supervisory statement setting out the basis on which firms would be expected to report leverage ratio information required under the UK leverage ratio framework.
- Appendix 6 – proposed reporting template FSA083 leverage ratio
- Appendix 7 – proposed transitional reporting template FSA084 leverage ratio - transitional
This consultation closed on Monday 12 October 2015. Views are welcome on all aspects of the PRA’s proposals to implement the FPC’s Direction and Recommendation on leverage ratio tools. In particular, respondents are encouraged to provide comments on the reporting and disclosure requirements proposed, as these were not discussed in the FPC’s consultation on its leverage ratio framework in 2014. Responses that provide a detailed quantitative assessment of firms’ incremental compliance costs as a result of complying with the averaging requirements would be particularly welcome. Respondents’ feedback is important in helping the PRA to shape the framework.
PRA statement on housing tools, 10 July 2015
A PRA statement on housing tools that sets out the PRA’s intended implementation approach to FPC Directions on housing tools, outlined in the FPC’s Policy Statement ‘The Financial Policy Committee’s powers over housing tools’, published on 1 July 2015.