In this consultation paper (CP), the Prudential Regulation Authority (PRA) proposes to update the Pillar 2 capital framework to reflect continued refinements and developments in setting the PRA buffer (also referred to as Pillar 2B).
Since the PRA published its approach to setting the PRA buffer, the Bank of England’s (Bank’s) approach to stress testing has evolved. There have been changes to the stress testing hurdle rate and the way microprudential and macroprudential buffers interact. This in turn has implications for the way that the PRA buffer is calculated.
The PRA also proposes to clarify its approach to assessing weaknesses in risk management and governance, explain the process for updating the benchmarks used to calculate the Pillar 2A requirement for credit risk and correct some minor drafting errors that have been identified in previous publications.
This CP is relevant to PRA-authorised banks, building societies and PRA-designated investment firms (‘firms’). This CP is not relevant to credit unions, insurance and reinsurance firms.
The PRA buffer is an amount of capital that firms should maintain in addition to their total capital requirements to absorb losses that may arise under a severe stress scenario, while avoiding duplication with the combined buffers. It may also be increased where the PRA assesses a firm’s risk management and/or governance to be significantly weak.
In 2015, the PRA set out the methodologies used in setting Pillar 2 capital for firms. This document was the first significant step towards increasing the transparency of the Pillar 2 capital framework. The proposals in this CP offer further clarity on the way that the PRA buffer is set. The PRA is not proposing to alter the purpose of the PRA buffer through these changes.
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, the PRA seeks to promote financial stability, the safety and soundness of PRA-authorised firms, and facilitate more informed and effective capital planning for banks.
The PRA proposes to implement the proposals in the CP by Tuesday 1 October 2019.
Responses and next steps
This consultation closes on Thursday 13 June 2019. The PRA invites feedback on the proposals set out in this consultation. The PRA is particularly interested in respondent’s views on areas where further clarity is needed.
Please address any comments or enquiries to CP5_19@bankofengland.co.uk.