On 18 December 2019, the PRA published a letter from Sam Woods, PRA CEO and Bank of England Deputy Governor, Prudential Regulation, to Tushar Morzaria, Chair of the Working Group on Sterling Risk-Free Rates (the Working Group). The PRA’s letter is in response to a communication from the Working Group earlier this year regarding regulatory capital impediments to Interbank Offered Rates (IBOR) transition.
The PRA’s letter covers the main themes highlighted in the body of the Working Group’s letter, being: AT1 and Tier 2 capital, bilateral margin requirements for non-cleared derivatives, rules related to resolution, and counterparty credit risk, market risk and interest rate risk in the banking book.
The PRA also states that its supervisors will be meeting with major firms in Q1 2020 to discuss how such firms can take an appropriate approach to managing the risks through LIBOR transition and the PRA will expect appropriate analysis to feature in the upcoming Internal Capital Adequacy Assessment Process. PRA supervisors will write to firms with Internal Model Method and Internal Model Approach approvals to ask them to identify the number and type of models that will need amending and to let supervisors know when they expect to submit model changes for pre-approval. Based on the responses the PRA will look to communicate its plans for model review in Q2 2020.