In August the Prudential Regulation Authority (PRA) published its consultation on changes to its rules to implement the CRD IV package (CP 5/13 'Strengthening Capital Standards: Implementing CRD IV'). A similar consultation process is underway for investment firms regulated by the Financial Conduct Authority (FCA).
The CRD IV package – comprising a new EU Capital Requirements Regulation (CRR) and a revised Capital Requirements Directive (CRD IV) – will apply from 1 January 2014. The consultation paper summarised how the PRA planned to implement the Directive, and the extent to which it would exercise national discretions available in the Regulation, together with changes to the PRA Handbook required as a result of the direct application of the Regulation in the UK. The Regulation, which contains the majority of the detailed capital and liquidity rules, is mandatory and applies directly to all institutions throughout EU/EEA without the need first for transposition into national law. This is in contrast to previous CRD packages, which were effected solely through a Directive.
The consultation closed on 2 October 2013. The PRA's final Policy Statement, rules and supervisory statements will be published in December, after approval by the PRA Board. There remains significant uncertainty about the CRD IV package, but firms should not let that distract them from taking concrete steps now to prepare. Timelines will be short after the Policy Statement is released: some elements will take effect from 1 January 2014. As importantly, there are many more elements of the CRD IV package to determine. For example, firms should start reviewing their existing and proposed capital and liquidity structures and any existing waivers in the light of this new guidance. Finalising treatment of the issues that the PRA has addressed now will create time and space for management to tackle other aspects in the future.
Key elements of the PRA's proposed approach
Who will be impacted?
The CP sets out proposed changes to the PRA's rules relevant to banks, building societies and PRA-designated investment firms (systemically important investment firms). Other investment firms come within scope of the FCA.
How will the CRD IV package impact the current PRA rulebooks?
The CRR is the 'single EU rulebook' that gives effect to the majority of the Basel III principles, including quality of capital, credit, market, operational and counterparty credit risk, together with liquidity and leverage requirements. In the UK, the majority of BIPRU will be replaced by the provisions of the CRR, with the exception of the liquidity rules set out in BIPRU 12. The PRA is also proposing to replace GENPRU with the related CRR provisions, except for GENPRU 3 on cross-sector groups. Amendments to SUP and SYSC will also be made where necessary.
The technical guidance on the new regulation will also come directly from EU via the EBA's technical standards (RTS) and Frequently Asked Questions internet portal.
When will the new capital requirements apply in the UK?
The CP proposes that no transitional path will be applied for deductions from Common Equity Tier 1 capital (CET 1), implying that 100% of all deductions and filters will apply from 1 January 2014, with the exception of holdings in financial sector entities within the same consolidated group. This may represent a significant additional challenge for some firms in meeting the new capital standards.
The PRA does not intend to accelerate the minimum CRR transitional path for the definition of capital or the imposition of minimum Pillar 1 capital requirements except as indicated above.
How will the new rules impact the UK Pillar 2 regime?
The concept of Pillar 2A (the regulator's additional minimum capital requirement for risks not sufficiently covered by Pillar 1) and the current ICAAP process of risk evaluation and capital adequacy assessment will remain under the new CRD IV regime, however the capital requirement will have to be met with at least 56% CET 1 capital by 1 January 2015.
The current Pillar 2B requirement (the Capital Planning Buffer) will continue alongside the new CRD IV capital buffers while they are phased in.
The PRA introduces a firm-specific PRA buffer in addition in addition to Pillar 1, Pillar 2A and the CRD buffers where these do not sufficiently cover capital requirements under stress. This PRA buffer will replace the current Pillar 2B.
The PRA is still to provide guidance on the new Pillar 2 regime, meaning that the current Pillar 2B policy remains in force until this position has been clarified.
Will the new requirements impact the current UK liquidity regime?
Until the CRD IV Liquidity Coverage Ratio (LCR) comes into force on 1 January 2015, the PRA liquidity regime, including liquidity reporting contained in BIPRU 12 and SUP 16 will continue to apply to PRA authorised firms. How the PRA liquidity regime will change upon the specification of the LCR is still uncertain. The PRA has decided not to exempt the investment firms it supervises from the CRR liquidity regime.
New liquidity reporting standards are coming into force in 2014 under the CRR reporting obligation on the LCR and NSFR. These standards are different from the current FSA liquidity reporting requirements and will impact firms reporting processes, data requirements and overall liquidity management frameworks.
Will firms' current PRA waivers remain eligible under the new regime?
Where the BIPRU and GENPRU rules are replaced by substantially equivalent requirements in the CRR, the PRA has the power to grant equivalent permissions such that they are carried forward under the new regime.
The PRA intends to grant permissions to all firms where the firm is fully compliant with the relevant BIPRU/GENPRU rule and any specific waiver conditions.
View the full paper on the Bank of England website.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.