Out-Law News 2 min. read
20 Oct 2015, 5:36 pm
The PRA is currently consulting on the criteria it intends to use to classify firms as 'other systemically important institutions' (O-SIIs), in line with EU rules contained in the latest Capital Requirements Directive (CRD IV). It intends to align this classification with its existing 'potential impact' framework as far as possible, to reduce the potential burdens that the new framework could have on firms, according to the consultation paper (14-page / 422KB PDF).
"The approach to O-SII identification and the ensuing supervisory approach set out in this [consultation paper] ensure that the O-SII framework will fit into the current supervising approach in a way that minimises additional burden on firms," it said in its consultation. "It will also enable the PRA to focus its resources on those firms whose distress or failure has adverse effects on the stability of the UK financial system and will ensure that the PRA's approach is transparent to market participants and the general public."
It added that identification of a firm as an O-SII should not have a "direct economic impact on firms", as its supervisory approach would "not be a significant departure from existing supervisory procedures and intensity".
CRD IV requires national regulators to identify domestic systemically important banks and O-SIIs, as well as global systemically important banks. Regulators must also take measures to reduce the probability and impact of the failure of the firms identified as belonging to these categories; which may include higher loss absorbency requirements, more intensive supervision and resolution requirements.
The PRA intends to identify UK O-SIIs annually, according to the consultation paper. Identification will be based on guidelines by the European Banking Authority (EBA), which scores institutions for risk based on their total assets, importance, complexity and interconnectedness. Each of these elements carries equal weighting for the purposes of the assessment, although all but total assets are broken down into further sub-categories set out in the consultation document.
Firms designated as O-SIIs in the UK will not generally be required to maintain additional capital buffers, according to the PRA consultation. The UK has instead opted to implement a systemic risk buffer, which will apply to banks and building societies which meet the thresholds for ring-fencing under domestic laws which are due to take effect in 2019. The Financial Policy Committee (FPC), which is the part of the Bank of England which oversees UK economic stability, will consult on its systemic risk buffer criteria next year, according to the consultation.
Firms caught by the new designation will already by subject to tighter regulation and will be expected to produce resolution and recovery plans in line with existing regulatory requirements, according to the consultation. The PRA could also "further enhance its supervisory approach towards O-SIIs in the future", it said.
The consultation closes on 18 January 2016. The PRA said that it would publish its final policy statement in early 2016.