PS9/22 - Amendments to the PRA's approach to identifying other systemically important institutions (O-SIIs)

1. Overview

1.1 This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 13/22 ‘Amendments to the PRA's approach to identifying other systemically important institutions (O-SIIs)’. It also contains the PRA’s final policy, as follows:

• updated Statement of Policy (SoP) ‘The PRA’s approach to identifying other systemically important institutions (O-SIIs)’ (Appendix 1); and
• updated list of EU Guidelines in the Annex of the SoP ‘Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU’ (Appendix 2).

1.2 This PS is relevant to credit institutions, investment firms, and parent (mixed) financial holding companies incorporated in the UK. This PS does not apply to third-country branches operating in the UK.

Background

1.3 In CP13/22, the PRA proposed amendments to SoP ‘The PRA’s approach to identifying other systemically important institutions (O-SIIs)’ and to the list of EU Guidelines in the Annex of SoP ‘Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU’. The proposed amendments involved:

• the removal of the European Banking Authority’s (EBA) scoring methodology from the O-SII identification process, and deletion of the EBA Guidelines, such that the scores used to inform O-SII identification are based solely on the PRA’s scoring methodology; and
• updates to specific indicators and weights in the PRA’s scoring methodology for O-SII identification.

Summary of responses

1.4 The PRA received one response to the CP. The respondent generally welcomed the PRA’s proposals. The respondent made some observations and suggested changes which are set out in Chapter 2.

Changes to draft policy

1.5 The PRA has made two modifications to the draft SoP:

• in response to feedback received, added a paragraph to clarify the interaction of O-SII designation with the O-SII buffer; and
• removed its intention to publish scores and the rationale for any use of supervisory judgement.

1.6 In carrying out its policy making functions, the PRA is required to have regard to several matters, as set out in CP13/22 in Appendix 3, 'The PRA's Statutory Obligations'. In CP13/22, the PRA explained how it had had regard to the most relevant of these matters in relation to the proposed policy. Below, the PRA provides relevant updates to that explanation, taking into account consultation responses.

1.7 The PRA should exercise its functions transparently. The added paragraph in the final policy to clarify the interaction between O-SII designation and the O-SII buffer enhances transparency. The PRA considers that, in publishing a detailed description of the approach it uses to identify O-SIIs, as well as the list of firms designated each year, it maintains transparency. Removing the intention to publish scores further streamlines the process, consistent with other updates to the SoP, and therefore promotes the efficient use of PRA resources.

Implementation and next steps

1.8 The implementation date for the policy is Tuesday 29 November 2022. The PRA has at the same time published the 2022 list of firms designated as O-SIIs, under the updated policy.

1.9 References related to the UK’s membership of the EU in the SoPs covered by the policy in this PS have been updated as part of this PS to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law. Visit the Transitioning to post-exit rules and standards webpage, for more information.

2. Feedback to responses

2.1 The PRA must consider representations that are made to it in accordance with its duty to consult on its general policies and practices and must publish, in such manner as it thinks fit, responses to the representations.

2.2 The PRA has considered the response received to the CP. This chapter sets out the PRA’s feedback to this response, and its final decisions.

2.3 The sections below have been structured broadly along the same lines as the chapters of the CP, as follows:

• PRA scoring methodology; and
• O-SII identification publication.

PRA scoring methodology

2.4 The PRA proposed updates to specific indicators and weights in the PRA’s scoring methodology for O-SII identification. These included an increase in the weight of the ‘retail banking’ category to 150%, reflecting the importance of this category to the UK economy and financial system.

2.5 One respondent suggested differentiating between current accounts and savings or ISA accounts, due to the former being more important for financial stability than the latter.

2.6 Having considered the response, the PRA has decided to maintain the scoring methodology for O-SII identification as set out in CP13/22. The scoring methodology is based on a number of quantitative indicators, all of which are available to the PRA through regulatory reporting or in-house data. Sub-dividing indicators would add complexity and could require ad hoc data requests from firms, increasing the cost of the O-SII identification process both for firms and the PRA. This would be contrary to the overall purpose of the proposed changes to the policy, which is to streamline the PRA’s approach to identifying O-SIIs, reducing the cost of the annual O-SII identification process, both for the PRA and for firms. Firms’ scores based on the scoring methodology are used in combination with supervisory judgement to determine whether to designate firms as O-SIIs. As part of this, the PRA would take into account any other relevant factors.

O-SII identification publication

2.7 The PRA will conduct the O-SII identification annually and publish the list of firms designated as O-SIIs by 1 December each year.

2.8 One respondent suggested it would be beneficial for the PRA to share the results of all assessed firms individually. The respondent argued that this would enable firms to better plan future strategies and growth plans to allow for additional capital requirements that O-SII designation brings.

2.9 The PRA considers that it provides transparency to firms on the O-SII identification process via its SoP, which sets out its approach, and its annual O-SII designation, which is published on the PRA website. Additionally, for firms not designated as O-SIIs, the PRA expects that, as part of ongoing supervisory engagement, it would inform firms on a bilateral basis where they are close to O-SII designation.

2.10 Having considered the response, the PRA has decided to make a clarification in the SoP on the interaction of O-SII designation with the O-SII buffer. The PRA notes that O-SII designation does not automatically result in higher loss absorbency requirements in the form of an O-SII buffer or otherwise. An O-SII buffer can only apply to O-SIIs or part of an O-SII that are ring-fenced bodies (RFBs) or large building societies. The Financial Policy Committee (FPC) maintains the framework for setting O-SII buffer rates,^{footnote [1]} according to which, O-SII buffer rates are determined based on firms’ UK leverage exposure measure.^{footnote [2]} The PRA sets O-SII buffer rates annually based on the FPC’s framework. The PRA has separately set out its approach in applying the FPC’s framework, ‘the PRA’s approach to the implementation of the O-SII buffer’.

2.11 In an effort to further streamline the O-SII identification process, the PRA has decided to remove its intention to publish scores and the rationale for any use of supervisory judgement. The requirement to publish scores was derived from relevant EBA Guidelines, which have now been deleted. O-SII designation is a binary decision, with scores informing the designation decision alongside supervisory judgement; the level of O-SII designated firms’ scores has no implications. Simplifying the process in this way continues to achieve the intended outcome of identifying firms whose distress or failure would have a systemic impact on the UK economy or financial system, while promoting the efficient use of PRA resources.