03 August 2015

Bank of England: Assessing capital adequacy under Pillar 2

PS17/15 has been updated to align references to the updates made in Supervisory Statement 31/15 ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)’ to incorporate a new chapter on reverse stress testing.

This policy statement (PS) sets out the Prudential Regulation Authority’s (PRA) responses to the feedback on Consultation Paper 1/15 ‘Assessing capital adequacy under Pillar 2’ (the CP). It sets out changes to rules and supervisory statements and finalises a statement of policy: ‘The PRA’s methodologies for setting Pillar 2 capital’. The PS is relevant to banks, building societies and PRA-designated investment firms.

This PS follows the same chapter structure as CP1/15. Where relevant, each section includes:

• the approach taken on the most significant issues raised by respondents, in particular noting those areas where the PRA is making a substantive change to the proposals contained in the CP. Where an issue is not addressed, the PRA is maintaining the policy approach set out in the CP; and
• clarifications, where the PRA considers it appropriate to use this PS to clarify issues of uncertainty raised in responses to the CP.

As set out in paragraph 2.30, the PRA recognises that some smaller institutions have short-term exposures to financial institutions for liquidity purposes and in practice might find it more difficult to diversify than larger firms. Supervisors may exercise judgement for smaller firms where they identify that the credit concentration risk methodology could overstate risks, or could incentivise risk-taking behaviour.

The new Pillar 2 framework will come into force from 1 January 2016. Where Supervisory Review and Evaluation Process (SREP) reviews are planned between August and December 2015, the PRA will discuss with the firm the application of the revised Pillar 2A methodologies. New ICG will be applicable from 1 January 2016.

The PRA will write to all firms before 1 January 2016 to convert their existing Capital Planning Buffer into a PRA buffer that offsets against the CRD IV combined buffer. Where firms have an existing Pillar 2A add-on for risk management and governance, the PRA will relocate this to their PRA buffer and update ICGs accordingly.

Press release

Policy statement

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