On 1 July 2015, the Financial Policy Committee (FPC) directed the PRA to implement a UK leverage ratio framework. The PRA has now published Consultation Paper 24/15: Implementing a UK leverage ratio framework (CP24/15) which sets out how the PRA intends to achieve this.
The FPC has two types of powers. It can give directions to the PRA and FCA to implement a specific measure to further the FPC’s objectives. It can also make recommendations to anybody, including the PRA and FCA.
The FPC has directed the PRA to implement a:
- 3% minimum leverage ratio requirement that is to apply immediately to UK G-SIIs and major UK banks and building societies on a consolidated basis;
- G-SII additional leverage ratio buffer (ALRB) that is to apply to UK G-SIIs identified by the PRA, also on a consolidated basis. The rate of the G-SII ALRB is to be calibrated at 35% of a relevant firm’s G-SII buffer rate. This buffer will be phased in from 2016, alongside the risk-weighted G-SII buffer; and
- countercyclical leverage ratio buffer (CCLB) that is to apply immediately to UK G-SIIs and major UK banks and building societies on a consolidated basis. The rate of CCLB is to be calibrated at 35% of a relevant firm’s countercyclical capital buffer rate, and rounded to the nearest 10 basis points. It comes into force on the same timescale as the minimum leverage ratio requirement.
CP24/15 has two key chapters:
- chapter 2: UK leverage ratio framework. This chapter outlines the proposed PRA implementation of the FPC’s direction and recommendation in relation to a domestic leverage ratio framework. It includes key components of the framework, such as scope of application, minimum leverage ratio requirement and buffers, definitions and reporting and disclosure requirements; and
- chapter 3: cost and benefit analysis. This chapter assesses the impact of the proposed rules, especially on reporting and disclosures.
The PRA’s proposed rules are set out in Appendices 1, 2 and 3 of CP24/15. Appendix 4 contains a draft supervisory statement setting out the PRA’s expectations in relation to the application of the UK leverage ratio framework as well as further clarification on the rules on the minimum requirement, the CCLB and how the G-SII ALRB will be set as a requirement for relevant firms. Appendix 5 contains a draft supervisory statement setting out the basis on which firms would be expected to report leverage ratio information required under the UK leverage ratio framework.
The deadline for comments on CP24/15 is 12 October 2015. The PRA plans to publish a Policy Statement by the end of 2015. The PRA proposes that the leverage ratio framework set out in CP24/15 should come into force on 1 January 2016.
View Implementing a UK leverage ratio framework – CP24/15, 10 July 2015