On Monday 16 December 2019, the Financial Policy Committee (FPC) raised the level of the UK countercyclical capital buffer (CCyB) rate that it expects to set in a standard risk environment from in the region of 1% to in the region of 2%. This was a structural change in the level of the CCYB in that standard risk environment, rather than in response to a change in the FPC’s view of the risk environment. In this consultation paper (CP), the Prudential Regulation Authority (PRA) proposes to update the Pillar 2A capital framework to take account of the additional resilience associated with higher macroprudential buffer requirements in a standard risk environment.
The proposals in this CP only relate to the 1 percentage point structural increase in the UK CCyB in the standard risk environment CCyB announced by the FPC on Monday 16 December 2019. Any subsequent changes in the UK CCyB rate, up or down, brought about by changes in the FPC’s view of the prevailing risk environment would not be reflected in changes in Pillar 2A.
The proposals in this CP would make amendments to Supervisory Statement (SS) 31/15 ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)’ (Appendix 1).
The CP is relevant to PRA-authorised UK banks, building societies and PRA-designated investment firms (‘firms’).
This CP should be read in conjunction with the Bank of England (the Bank) FPC’s December 2019 Financial Stability Report (December 2019 FSR) (page 36).
The proposals in this CP clarify the considerations relating to macroprudential buffers that the PRA takes into account when it carries out an overall assessment of the level of capital that would be sufficient to ensure the sound management and coverage of firms’ risks.
The proposal in this CP is part of a package that includes the review of the structural level and balance of capital requirements for the UK banking system undertaken by the FPC, including: the subsequent increase in the UK CCyB rate the FPC expects to set in a standard risk environment; and the Bank’s clarification that, in resolution, it expects all debt that is bailed in to be written down or converted to common equity Tier 1 (CET1). The purpose of this package, as outlined in the December 2019 FSR, is to:
- Increase resilience – while leaving the overall loss absorbing capacity for the banking system broadly unaffected, the changes would shift the balance of that capacity towards higher quality Tier 1 capital.
- Improve responsiveness of capital requirements to economic conditions – by shifting the balance of capital requirements from minimum requirements that should be maintained at all times towards buffers that can be drawn down as needed, these changes would mean that banks would be more able to absorb losses while maintaining lending to the real economy through the cycle.
- Enhance resolvability – The Bank’s intention, in resolution, to write down or convert debt to CET1 capital would make resolved banks more resilient to further losses, supporting their resolution and minimising the wider economic costs of their failure.
Responses and next steps
This consultation closes on Thursday 30 April 2020. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP2_20@bankofengland.co.uk.
The proposed implementation date for the policy proposed in this CP is Monday 6 July 2020. The PRA proposes to apply the Pillar 2A reduction, where applicable, at the same time or before the 2% UK CCyB rate comes into effect on Wednesday 16 December 2020.
The proposals set out in this CP have been designed in the context of the UK’s withdrawal from the European Union and entry into the transition period, during which time the UK remains subject to European law. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect.
The PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018 (EUWA). Please see PS5/19 ‘The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018’ for further details.
The draft SS attached to this CP should be read in conjunction with SS1/19 ‘Non-binding PRA materials: The PRA’s approach after the UK’s withdrawal from the EU’.
As these changes relate to EU Guidelines, they should be read in conjunction with the joint Bank and PRA Statement of Policy (SoP) ‘Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU’.