On 28 February 2020, the PRA published Consultation Paper 2/20: Pillar 2A: Reconciling capital requirements and macroprudential buffers (CP2/20).
The PRA sets Pillar 2A capital requirements for risks which are either not captured or not fully captured under the Capital Requirements Regulation. It assesses those risks as part of the supervisory review and evaluation process (SREP), in light of both firms’ internal capital adequacy assessment process and the PRA’s Pillar 2A capital methodologies, as set out in ‘Supervisory Statement 31/15: The Internal Capital Adequacy Assessment Process’ (SS31/15) and PRA Statement of Policy ‘The PRA’s methodologies for setting Pillar 2 capital’ (SoP).
On 16 December 2019, the Financial Policy Committee (FPC) raised the level of the UK countercyclical capital buffer (CCyB) rate that it expects to set in a standard risk environment from in the region of 1% to in the region of 2%.
In CP2/20 the PRA proposes to reduce variable Pillar 2A capital requirements to take account of the additional resilience associated with higher macroprudential buffers in a standard risk environment. The PRA proposes to only reduce the variable component of total Pillar 2A capital requirements. The reduction would not apply to the fixed elements of Pillar 2A, to ensure capital remains available to meet the claims arising from pension obligations. Other fixed add-ons, which may be set for IT risk for instance, would similarly not be reduced.
The proposed reduction would only be relative to the 1 percentage point increase in the standard risk-environment CCyB announced by the FPC on 16 December 2020. Any subsequent changes in the UK CCyB rate occasioned by changes in the FPC’s view of the prevailing risk environment would not be reflected in Pillar 2A. Pillar 2A would also, in general, only be adjusted at SREP assessments; so changes in a firm’s pass-through rate would, in general, not be reflected until the firm’s next SREP assessment.
The proposals make amendments to SS31/15.
The proposed implementation date for the proposals is 6 July 2020. The PRA proposes to apply the Pillar 2A reduction, where applicable, at the same time or before the 2% UK CCyB rate comes into effect on 16 December 2020.
The deadline for comments on CP2/20 is 30 April 2020.