Groups policy and double leverage

Published 30 April 2018

Groups policy and double leverage - PS9/18

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback on responses to Consultation Paper (CP) 19/17 ‘Groups policy and double leverage’.

It also contains updates to:

Rule 14.10 of the PRA Rulebook CRR Firms: ‘Internal capital adequacy assessment (No.2) instrument 2018’ (Appendix 1);
Supervisory Statement (SS) 31/15 ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) (Appendix 2);
Statement of Policy (SoP) ‘The PRA’s methodologies for setting Pillar 2 capital’ (Appendix 3); and
SS24/15 ‘The PRA’s approach to supervising funding and liquidity risks’ (Appendix 4).

This PS is relevant to PRA-authorised UK banks, building societies, PRA-designated UK investment firms and their qualifying parent undertakings (QPU), as well as credit institutions, investment firms and financial institutions that are subsidiaries of these firms, regardless of their location.

Summary of responses

The PRA received three responses to the CP. Respondents supported the overarching principle that consolidated capital requirements should take into account all risks that a group faces and that the financial strength of the holding company is of great importance. They sought clarity on certain aspects of the proposals, which are set out by theme in Chapter 2.

Implementation

The final rules, updated SSs, and SoP will come into effect from Tuesday 1 January 2019. Where practical and applicable, firms should continue to aim to incorporate the policy proposals in their ICAA and Individual Liquidity Adequacy Assessment (ILAA) submissions ahead of full implementation.

Policy Statement 9/18

Appendices

Published 4 October 2017

Groups policy and double leverage - CP19/17

Overview

Most international banking groups comprise many legal entities, regulated and unregulated, in multiple jurisdictions. As a result, the UK regulatory regime for banks includes prudential requirements relating both to individual legal entities (‘firms’) that undertake regulated activities such as deposit taking in the United Kingdom, and to the broader groups of which they form a part. The broader group context is important as the financial position of a firm may be adversely affected by its relationships with other entities in the same group or by risks that affect the financial position of the whole group, including reputational contagion. ‘Groups policy’ refers to the PRA’s framework for assessing and mitigating these risks.

The PRA has reviewed the groups policy framework, in order to ensure that it remains coherent and fit for purpose in light of post-crisis financial reforms – including Basel III standards, UK ring-fencing legislation, the resolution framework and other international developments. Following the review, the PRA is considering some necessary changes to achieve this objective.

This CP is relevant to PRA-authorised UK banks, building societies, PRA-designated UK investment firms and their qualifying parent undertakings (QPU), as well as credit institutions, investment firms and financial institutions that are subsidiaries of these firms, regardless of their location.

Summary of proposals

This consultation paper (CP) makes 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 funds some of the capital in its subsidiaries by raising debt or lower forms of capital externally (Chapter 2);
assessment and mitigation of the risks highlighted by prudential requirements applied by local regulatory authorities on overseas subsidiaries of UK consolidation groups (Chapter 2); and
improved monitoring of the distribution of financial resources across different group entities (Chapter 3).

In order to implement the above proposals, the PRA proposes to update:

Supervisory Statement (SS) 31/15 ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)’;
Statement of Policy ‘The PRA’s methodologies for setting Pillar 2 capital’;
SS24/15 ‘The PRA’s approach to supervising funding and liquidity risk’; and
Internal Capital Adequacy Assessment Part of the PRA Rulebook.

The PRA is also consulting elsewhere on a number of other policy proposals that refine the PRA’s framework for Groups Policy. They are summarised in Chapter 4.

The Bank of England is currently consulting on internal minimum requirements for own funds and eligible liabilities (MREL). The two CPs, together with proposals related to the Groups Policy framework being consulted on elsewhere, provide an update to 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 and gone concern. They should provide clarity to firms as they define their group resource allocation strategies to meet the expectations of post-crisis financial reforms.

Responses and next steps

This consultation closed on Thursday 4 January 2018.

Once the proposals are finalised, the policy will be implemented fully from 1 January 2019. Where practical and applicable, firms should aim to incorporate the consultation proposals in their 2018 ICAAP/Individual Liquidity Adequacy Assessment Process (ILAAP) submissions ahead of full implementation.

The PRA will keep its proposed approach and policy under review to assess whether any adjustments are required. In particular, the PRA will monitor the quality of information provided by firms in their ICAAPs/ILAAPs in order to ensure it is sufficient to meet the expectations set out in these proposals.

Consultation Paper 19/17