The Bank of England and the PRA announce further relief measures for PRA-regulated firms and FMIs

The Bank of England (the “BoE”) and the Prudential Regulation Authority (the “PRA”) announced measures to alleviate the operational burden on PRA-regulated firms (i.e. banks and systemic investment firms) and BoE-regulated financial market infrastructures (“FMIs”) (such as CCPs and payment systems) from the Covid-19 outbreak. The approach is consistent with the measures announced by the ECB and the EBA last week – see our dedicated webpage.

These measures include:

Cancellation of the BoE’s 2020 annual stress test – the annual cyclical scenario (ACS)

Consistent with the EBA’s decision to postpone its 2020 stress test, the BoE has decided to cancel the 2020 stress test for the eight major UK banks and building societies in order to allow them to focus on meeting the needs of UK households and businesses via the continuing provision of credit. Ensuring that credit continues to flow to individuals and corporates during this period of unprecedented market turmoil is a key goal of regulators. This is complementary to other measures with the same aim such as the FPC’s decision to reduce the UK countercyclical buffer (CCyB) rate to 0% of banks’ exposures to UK borrowers with immediate effect. The PRA confirms thatthat all elements of banks’ capital and liquidity buffers can be drawn down as necessary to support the economy through this temporary shock. Over the past decade, banks have been required to build up mostly CET1 capital buffers, including the capital conservation buffer, the systemic risk buffer, and Pillar 2B/PRA buffers. These buffers may provide a much needed capital cushion to offset potential losses.

Amendments to the biennial exploratory scenario (BES) timetable
  • Liquidity: In order to alleviate burdens on core treasury staff at banks, the BoE has paused the 2019 BES on liquidity which were due to be published in mid-2020.
  • Climate risk: On 18 December 2019, the BoE published a discussion paper on the 2021 BES on the financial risks from climate change. The BoE will record the responses and keep track of the evolving situation with a view to announcing the way forward for this exercise in the summer.
IFRS 9 and Covid-19

Under the Capital Requirements Directive, the PRA can consider whether firms’ provisioning under applicable accounting standards is flowing through into its regulatory capital position in an appropriate way. The IFRS9 accounting standards are a forward-looking measure of losses, which were previously not considered in IAS39. However, the BoE and PRA note that is uncertain how Covid-19 will impact the economy and decisions on accurate provisioning under IFRS 9 may be much more difficult.

Firms are expected to use forward-looking information to incorporate the impact of Covid-19 on borrowers into the expected credit loss (ECL) estimate which are reasonable and supportable for the purposes of IFRS9. However, the PRA acknowledges that there is very little such information available at this stage and it is challenging for firms to prepare reliable and detailed forecasts. Where firms believe such forecasts can be made, the PRA expects them to:

  • reflect the temporary nature of the shock
  • fully take into account the significant economic support measures already announced by global fiscal and monetary authorities
  • take into account the relief measures – such as repayment holidays – that will be made available to enable borrowers who are affected by the Covid-19 outbreak to resume regular payments.

The BoE is considering these issues with other regulatory authorities and will be publishing further information next week.

Postponement of the joint BoE Financial Conduct Authority (FCA) survey into open-ended funds

The planned survey covering c.300 funds has been delayed until further notice, with a subsequent impact on the FCA consultation that would have followed. The BoE notes that other similar surveys and regulatory measures will also be adapted in view of the current situation,

Relaxation of regulatory reviews and inspections

Consistent with the approach of other global and EU regulators, the PRA and BoE will postpone non-critical data requests, on-site visits and deadlines, where appropriate using the flexibility provided in the CRD/ Solvency II. This relaxation of regulatory measures also includes pausing the skilled persons Section 166 reviews relating to the reliability of banks’ regulatory returns that were announced in October 2019.

Senior Manager Function (SMF) applications

The PRA will review its approach for considering and processing applications with a view to reducing the burdens involved during current events.

Operational Resilience Policy Development

The deadline for responses to the current BoE and PRA consultations on “Building Operational Resilience: Impact tolerances for important business services” and the PRA consultation on “Outsourcing and third party risk management” will, in line with the FCA, be extended to 1 October 2020.

Banks using the Internal Ratings Based (IRB) approach

Banks which use the IRB approach to credit risk are generally implementing a programme (‘the EBA roadmap’) that aims to reduce variability of models across the banking sector. Proposals on the final phase were published in Consultation Paper (CP) 21/19 ‘Credit Risk: PD and LGD estimation’ on 18 September 2019. Implementation of the proposals related to the Definition of Default, Probability of Default, and Loss Given Default estimation, will be delayed by one year to 1 January 2022. The move to ‘hybrid’ IRB models will also be delayed until the same date, 1 January 2022.

Firms using the standardised approach to credit risk will also benefit from a delay to changes they need to make as part of guidelines on definition of default (where the PRA had used its discretion earlier this year to apply a stricter days past due test).

Financial Services Regulatory Initiatives Forum (RIF)

The RIF has been established (i) to help regulators identify and manage peaks in operational demands on firms and FMIs resulting from regulatory initiatives and (ii) to ensure firms and FMIs have an early and clearer understanding of them. Therefore, the first meeting of the RIF will take place as soon as possible in April 2020 to assist co-ordination of the regulatory initiatives. Publication of the Regulatory Initiatives Grid after that meeting will ensure that industry has full sight of a coordinated future work plan as early as possible in light of Covid-19.

Implementation of Basel IV and regulatory change

HMT had announced that the UK would be introducing legislation to implement the finalised Basel III measures (known as Basel IV) due to be implemented by 1 January 2022 in the UK regardless of the progress of the EU proposals. However, the PRA acknowledges that the existing Basel timetable may prove to be challenging and is coordinating internationally to ensure that implementation will happen alongside other major jurisdictions. These measures include substantial changes to both the standardised and IRB approach to credit risk, as well as the output floor which limits the capital benefit of the internal approaches compared to the standardised rules, as well as leverage ratio and operational risk amendments. Basel IV is anticipated to lead to a substantial increase in capital requirements for a large number of banks. More generally, the PRA will also review its programme of regulatory change. Where appropriate, the PRA will postpone non-critical work at the current time to allow firms and FMIs to focus on their safety and soundness, the protection of policyholders and delivering their functions. Whilst the PRA states that it will review its programme of regulatory change, there is no specific mention of the UK implementation of the CRR2/CRD5 rules which are due to come into effect in June 2021/December 2020 respectively.

It remains to be seen whether the BoE’s/PRA’s relaxation measures will be sufficient help for banks, given the severity of the Covid-19 crisis, or whether the regulators may have to relax or delay more prudential measures.