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Mondial | Publication | November 2017
On 4 October 2017, the Prudential Regulation Authority (PRA) published two consultations that are particularly important to international banking groups, Consultation Paper 19/17: Groups policy and double leverage (CP19/17) and Consultation Paper 20/17: Changes to the PRA’s large exposures framework (CP20/17).
CP19/17 and CP20/17 are part of a series of consultations that the PRA is conducting that are intended to provide clarity to international banking groups as they define their group resource allocation strategies to meet the expectations of the post-crisis financial reforms including the Basel III standards, UK ring-fencing, the resolution framework and other international developments.
Specifically, the proposals in CP19/17 are intended to update the existing policy framework on the distribution of financial resources in banking groups, the calibration of requirements for individual group entities and the treatment of intragroup relationships in both going concern and gone concern. The proposals in CP20/17 are intended to ensure that risks associated with intragroup exposures are managed appropriately, and to improve the PRA’s supervision of firms’ intragroup exposures.
Further, the PRA believes that geofinance, the impact of geography on the geometry of finance, is likely to be the defining challenge of the next few years and groups operating across borders will need to be resilient according to their global foot print. By getting to grips with geofinancial issues the PRA is showing that as a home supervisor it can ensure that cross-border banks do not present excessive risks to financial stability. For further information on geofinance, see the speech by the PRA’s Chief Executive Officer, Sam Woods, at the Mansion House City Banquet on 4 October 2017.
CP19/17 sets out the PRA’s proposals regarding changes to the requirements relating to intragroup relationships and double leveraging of capital resources. The PRA has proposed updates to Supervisory Statements 31/15 on the ICAAP and SREP process and 24/15 on funding and liquidity risks, as well as its Statement of Policy on ‘The PRA’s methodologies for setting Pillar 2 capital’ and the Internal Capital Adequacy Assessment Part of the PRA Rulebook.
In summary CP19/17 sets out proposals that require:
The PRA outlines other proposals (on which it has consulted separately) that will refine the groups policy framework. These proposals cover setting the Pillar 2A capital requirement on an individual basis, large exposures, and intragroup liquidity risk.
The deadline for responding to CP19/17 is 4 January 2018.
CP20/17 sets out the PRA’s proposals regarding changes to the requirements relating to intragroup transactions in the large exposures regime. PRA Supervisory Statement 16/13 on large exposures and the Large Exposures Part of the PRA Rulebook are proposed to be updated to reflect the changes.
The PRA is proposing the following regarding intragroup permissions:
Due to minimum requirements of own funds and eligible liabilities (MREL), the PRA is also proposing to allow firms to apply to exempt from the large exposures limit, exposures identified, and reported as internal MREL.
The proposed updates to the Supervisory Statement seek to promote transparency in the way that the PRA assesses whether conditions for CUG and NCLEG permissions are met, supporting more efficient decisions across all firms.
Like CP19/17 the deadline for comments is 4 January 2018.
As discussed in the answer to question one above there are a series of consultations regarding updating the policy framework on the distribution of financial resources in banking groups. In relation to other consultations, these are, in addition to CP19/27 and CP20/17:
The PRA’s Annual Report and Accounts 2016-17 noted that the regulator will take forward its approach to the supervision of UK subsidiaries of overseas banking groups once arrangements following the UK’s withdrawal from the EU are clear.
This article was first published on Lexis®PSL Financial Services on 16 November 2017.
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