The PRA has published Consultation Paper 3/17: Refining the PRA’s Pillar 2A capital framework (CP3/17).

CP3/17 is relevant to banks, building societies and PRA designated investment firms. The PRA is proposing to refine its Pillar 2A capital framework that came into force on 1 January 2016. The purpose of the proposals is to make the PRA’s Pillar 2A capital assessment more robust and more proportionate by addressing some of the concerns over the differences between the standardised approach (SA) and internal rating based (IRB) risk weights and by updating the calibration of the IRB benchmark.

Specifically the PRA proposes to:

  • adjust its Pillar 2A approach for firms using the SA for credit risk. This new approach may also apply, on a case-by-case basis, to those portfolios that are subject to the SA at firms employing IRB models for other portfolios;
  • update its IRB benchmark using end-2015 data collected via regulatory returns, stress testing and the Pillar 2 data item FSA082; and
  • for firms using the SA for credit risk and IFRS as their accounting framework, the PRA is proposing to introduce a separate IRB benchmark, based on unexpected losses. Expected loss would be removed from the calculations of the average IRB risk weights.

To implement the proposals the PRA plans to amend:

  • Statement of Policy – The PRA’s methodologies for setting Pillar 2 capital;
  • Supervisory Statement 31/15: Internal Capital Adequacy Assessment Process and the Supervisory Review and Evaluation Process
  • Supervisory Statement 32/15: Pillar 2 reporting instructions; and
  • The Pillar 2 Reporting Part of the PRA Rulebook.

The proposed implementation date for the updated Pillar 2A capital framework is 1 January 2018. The PRA will also assess whether on-going adjustments to the Pillar 2A approach may be required in light of developments on the proposed revisions by the Basel Commission on Banking Supervision to the standardised and IRB approaches for credit risk.

The deadline for comments to CP3/17 is 31 May 2017.

View PRA launches consultation on Pillar 2A capital framework, 24 February 2017