PRA statements on further relief measures and prioritisation in light of Covid-19

The Prudential Regulation Authority (“PRA”) and the Bank of England (“BoE”) have published a number of statements over the past 6 weeks containing various measures aimed at alleviating operational burdens and relieving capital pressures on PRA regulated firms as a result of the Covid-19 pandemic. The purpose of these measures is to ensure that banks continue to lend to households and corporates and focus all their resources on this key aim. The measures proposed in today’s statement include setting Pillar 2 as a nominal amount over the next two years; delay of the Climate Biennial Exploratory Scenario and delays in resolution measures including the Resolvability Assessment Framework (“RAF”). We set out below a summary of some of the key measures.

Statement on Resolution measures and Covid-19

The PRA and BoE announced various changes to resolution measures, as well as an update on the Minimum requirement for Own Funds and Eligible Liabilities (“MREL”).

  • RAF: The dates on which the eight “in scope” major banks and building societies were required to submit their first self-assessment reports for resolution and make their first public disclosures under the RAF have been extended by a year, on the basis that by this time senior management will be able to engage fully in the RAF report submission. Therefore, the first self-assessment reports must be submitted to the PRA by October 2021 and the first disclosures must be made by June 2022. The BoE will make its first public statements on these firms’ resolvability by June 2022.The PRA intends to consult in due course on changes to the Resolution Assessment Rules.
  • MREL: The required 2021 MRELs will be adjusted to reflect the PRA’s new policy of setting Pillar 2A capital as a nominal value rather than as a percentage of risk weighted assets . In addition, the BoE will take into account market developments in setting January 2021 MRELs and indicative January 2022 MRELs and will exercise its discretion in relation to the transition time that firms are given to meet higher MRELs arrangements. Firms which are not currently subject to a binding leverage ratio (i.e. all CRR firms apart from the 8 largest UK deposit takers) but will be subject to one, will be given at least 36 months after they are subject to a binding leverage ratio, to meet the higher MREL resulting from it.
  • Reporting and valuation: The compliance deadline for the Bank’s Statement of Policy on valuation capabilities has been extended by 3 months to 1st April 2021. The immediate operational burden of resolution planning has been removed- firms will not be required to submit certain resolution pack information until the end of 2022.
Statement on conversion of Pillar 2A Capital requirements

The PRA has announced a major change to the calculation of Pillar2A capital requirements for PRA firms which should in most cases reduce the Pillar 2 capital requirement during the Covid-19 pandemic and thereby free up capital for use in the lending to the wider economy. It should be noted that this policy only applies to PRA firms and not to FCA regulated firms.

  • The PRA requires PRA regulated firms to hold sufficient capital to meet their Total Capital Requirement, which is made up of Pillar 1 and Pillar 2A capital. Pillar 1 encompasses credit risk, market risk and operational risk, while Pillar 2A is meant to capture idiosyncratic risks that are not captured at all or not adequately captured by Pillar 1, such as residual risks, interest rate risk, group risk and business risk. Each year the PRA will set the Pillar 2A requirement as a percentage of the total risk weighted assets of each CRR firm. If the Pillar 2A percentage stayed the same but the RWA increased, the Pillar 2 A requirement would automatically proportionally increase. The PRA states that RWAs are not a good approximation for the evolution of risks captured in Pillar 2A during a stress period like Covid-19, and therefore in order to alleviate firms from capital pressure of an absolute increase in Pillar2A requirements in the current market stress, have decided to set Pillar 2A as a nominal amount. This will, in the PRA’s view both reduce firms’ Pillar 2A, as well as the threshold at which firms are subject to maximum distributable amount restrictions.
  • The PRA will set firms’ Pillar 2A as a nominal value in the 2020 and 2021 SREPs. Firms that are subject to a 2020 SREP do not need to file a formal application to vary their Pillar2A requirements, but firms who do not have a SREP 2020 assessment due, can apply for a conversion of their current Pillar2A requirement into a nominal amount using RWAs as of end December 2019.The PRA notes that the change is voluntary, subject to supervisory agreement and would apply until the firms next scheduled SREP.
Statement by the PRA on prioritisation in light of Covid-19

The PRA and BoE set out a number of further measures to alleviate operational burdens on firms and ensure they focus their resources on the highest priority work.

Climate change

Recognising current pressure on firms, and in light of the responses to the December 2019 Discussion Paper on the Climate Biennial Exploratory Scenario, the PRA and FPC have agreed to postpone the launch of the stress test exercise until at least mid-2021. However, the BoE will resume its work on climate risks including:

  • continued support for firms’ enhancements of their climate risk capabilities. To aid this, this summer the PRA will issue follow-on guidance on the PRA’s 2019 Supervisory Statement on enhancing firms’ approaches to managing the financial risks from climate change. Furthermore, the outputs from the Climate Financial Risk Forum (an industry group set up in 2019 to bring together leading practice across the financial sector, and chaired jointly by the PRA and FCA) will be published [at the end of May/in the next month];
  • continuation of the BoE’s international engagement on climate issues; and
  • continued focus on embedding climate disclosure across the financial system, including through the BoE’s own disclosures.

LIBOR transition

Due to Covid 19, the PRA and FCA suspended transition data reporting at the end of Q1, and cancelled some Q1 firm meetings. The PRA and FCA have decided to resume full supervisory engagement on Libor from 1 June 2020, including data reporting at the end of Q2. Libor transition appears to now be fully back on the agenda and no more postponements are mentioned.

Market risk- SVaR

  • In the PRA Supervisory Statement on Market Risk (SS13/13) the PRA set their expectations on how the 12-month period used for Stressed VAR (“SVAR”) should be calculated, and how frequently it should be reassessed. In relation to the latter point, the PRA confirmed today that they do not expect firms to update their SVAR 12-month period during the current period of financial market stress, other than if a firm’s current period no longer represents a significant period of stress for the firm’s portfolio (e.g. due to a material change in risk profile). The CRR requires firms to review the choice of historical data at least annually and, although in normal circumstances the PRA have set an expectation of quarterly reviews, in the current circumstances, they will permit firms to delay this review until December 2020, in line with EBA guidance.

Insurance stress test

  • The PRA has decided to pause further work on the Insurance Stress Test, given other pressures on firms and the need to focus on Covid-19 specific stresses.
  • The PRA notes that in addition to these specific areas detailed above, it is continuing to make other adjustments and review ongoing plans to support firms while ensuring their safety and soundness is maintained. This includes postponing or scaling back planned reviews, consultations and policy announcements where suitable; wide-ranging reprioritisation of the PRA’s internal initiatives and development workstreams and deferring governance decisions on some less critical matters where possible. It is therefore likely that further measures will be announced in due course.