ps725app1.pdf

The document outlines the methodologies used by the Prudential Regulation Authority (PRA) to set Pillar 2 capital requirements for banks and other financial institutions in the United Kingdom. Here are the key points summarized:

Updates

1. January 2020: The PRA updated its methodology for assessing Pillar 2A credit risk, including changes to the credit risk benchmark and additional benchmarks for commercial real estate (CRE) portfolios.
2. October 2018: The PRA introduced a new data item, PRA111, to capture stress testing data currently included in firms' Internal Capital Adequacy Assessment Process (ICAAP) documents.
3. December 2017: Pillar 2A capital requirements became a requirement, replacing guidance.

Key Methodologies

1. Pillar 2A Credit Risk: The PRA assesses credit risk using a benchmark that takes into account the firm's expected loss rate and its exposure to CRE portfolios.
2. Total Capital Requirement (TCR): The TCR is the sum of Pillar 1 capital requirements and Pillar 2A capital requirements.
3. Pillar 2A Individual Capital Guidance: Firms are assigned an individual capital guidance based on their risk profile, which informs their Pillar 2A capital requirements.
4. Ring-Fenced Bodies (RFBs): The PRA sets prudential requirements for RFBs, including rules for intragroup arrangements and use of financial market infrastructures.

Other Updates

1. Double Leverage: UK parents of RFBs are expected not to use double leverage to fund their investment in an RFB or other entities.
2. Systemic Risk Buffer (SRB): The FPC recommended that the SRB framework should be implemented, which informs the PRA's assessment of the total amount of the PRA buffer at consolidated group level.

Effective Dates

1. January 2019: New expectations for RFBs take effect.
2. October 2018: Amendments to reporting requirements take effect.
3. December 2017: Pillar 2A capital requirements become a requirement.
4. February 2017: Implementation of ring-fencing rules takes effect.

References

1. Bank of England (2020). The PRA's methodologies for setting Pillar 2 capital [Policy Statement].
2. Bank of England (2019). Responses to Occasional Consultation Paper 25/19 – Chapters 2 and 3.
3. Bank of England (2018). Groups policy and double leverage.
4. Bank of England (2017). Refining the PRA's Pillar 2A capital framework.

Please note that this summary is not exhaustive, but rather highlights the key points from the document.