UK: UK Prudential Regulation Authority Publishes Its Final Approach To Implementing The Systemic Risk Buffer

On December 5, 2016, the Prudential Regulation Authority published a Statement of Policy setting out its approach to the implementation of the systemic risk buffer. The SRB is used to prevent and mitigate long term non-cyclical macro-prudential or systemic risks not covered by the Capital Requirements Regulation. It is a firm-specific buffer based on a firm's risk weighted exposures and must be met with Common Equity Tier 1 capital. The Statement of Policy is relevant to ring-fenced bodies under the Financial Services and Markets Act 2000 and large building societies that hold more than £25 billion in deposits. These are jointly referred to as "SRB institutions." The UK Independent Commission on Banking recommended that the UK's systemically important SRB institutions be held to a higher capital standard. In addition to these recommendations, the UK legislation implementing the systemic risk buffer requires that the PRA apply the Financial Policy Committee framework as of January 1, 2019. The FPC's framework for the systemic risk buffer was published in May 2016.

The PRA's Statement of Policy confirms that: (i) the PRA will, in the exercise of sound supervisory judgement, only deviate from the SRB rates derived from the FPC framework in exceptional cases; (ii) for building societies in scope of the framework, the applicable basis of the framework will be the group consolidated basis for building societies that are the parents of consolidation groups and the individual basis for all others; (iii) the PRA expects to set the initial SRB rates of each SRB institution in early 2019 and that those rates will apply three months after being set, but the timeframe may be adjusted where appropriate; and (iv) following the application of the initial SRB rates, rates will be set and announced annually and will apply in the second year following the calendar year in which they are set. The PRA will review the Statement of Policy in 2018 and then subsequently at least every two years.

The Statement of Policy on implementation of the systemic risk buffer is available at: http://www.bankofengland.co.uk/pra/Documents/publications/sop/2016/srbapproach.pdf.

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