Latest PRA consultations impacting international banking groups

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:

• assessment and mitigation of the risks to group resilience due to the use of ‘double leverage’. Double leverage occurs when one or more parent entities in a group fund some of the capital in its subsidiaries by raising debt or lower forms of capital externally;
• assessment and mitigation of the risks highlighted by prudential requirements applied by local regulatory authorities (a regulatory authority outside the UK that is responsible for the regulation of subsidiaries established in its jurisdiction) on overseas subsidiaries of UK consolidation groups; and
• improved monitoring of the distribution of capital and liquidity resources across different group entities.

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:

• enhanced guidance on the application of criteria for core UK group (CUG) and non-core large exposures group (NCLEG) permissions;
• changing the NCLEG calibration basis for firms that have both a CUG and an BCLEG permission; and
• changing how the NCLEG permission applies at the UK consolidated group level.

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:

• Internal MREL – the Bank of England’s approach to setting MREL within groups, and further issues: consultation on a proposed updated Statement of Policy (October 2017). This consultation explains how the Bank of England propose to set loss absorbing capacity for material entities. Internal MREL facilitates orderly resolution. Banking groups will often be composed of many subsidiaries sometimes located in, and operating across, different countries. It is these operating companies that losses are likely to occur and these companies are likely to provide critical economic functions to the wider economy. To ensure that resolution tools can be used effectively, it is important that the financial resources needed to absorb these losses are appropriately distributed within the group. The consultation closes on 2 January 2018;
• PRA Consultation Paper 13/17: Pillar 2 liquidity (July 2017). The consultation closed on 13 October 2017. In this consultation the PRA set out proposals on a cashflow mismatch risk framework and other PRA methodologies for assessing firms’ liquidity risk, under the Pillar 2 liquidity framework. Among other things the PRA proposes to assess intragroup liquidity risk on a case-by-case basis, taking into account intragroup interconnectedness; and
• PRA Consultation Paper 12/17: Pillar 2A capital requirements and disclosure (July 2017). The consultation closed on 12 October 2017. Essentially is covers three areas: (i) setting Pillar 2A capital as a requirement undersection 55M of the Financial Services and Markets Act 2000 (Act) rather than as guidance, and the introduction of the term ‘Total Capital Requirement’ (TCR); (ii) revising the PRA’s capital disclosure policy; and (iii) clarifying when and how Pillar 2A capital requirements may be set at individual (solo) level.

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.