The PRA has published a Statement of Policy (SoP) that sets out the regulator’s approach to implementing the systemic risk buffer (SRB). The SoP is relevant to ring-fenced bodies, within the meaning of section 142A of the Financial Services and Markets Act 2000 (FSMA), and large building societies that hold more than £25 billion in deposits (where one or more of the accountholders is a small business) and shares (excluding deferred shares) – together ‘SRB institutions’.
The SRB is a firm-specific buffer (i.e. its amount may vary from SRB institution to SRB institution). It is based on an SRB institution’s worldwide risk-weighted exposures and each SRB institution will be required to ensure that it is met solely with Common Equity Tier 1 capital. In addition, capital designated for the SRB cannot be used to meet any other capital requirements or buffers. Where an SRB institution is subject to both a global systemically important institution buffer and an SRB on the same basis of consolidation, the higher of the two shall apply.
Where the PRA has decided to impose an SRB, it will invite the SRB institution to apply for a requirement to be imposed on it under section 55M of FSMA. Where firms do not apply, the PRA will consider imposing such a requirement on its own initiative.
The SRB framework will apply from 1 January 2019. The UK framework for the SRB will be formed by the SoP and the Financial Policy Committee’s framework for the SRB published in May 2016.
Following the application of the initial SRB rates, the PRA will re-apply the SRB framework annually in the manner outlined in paragraphs 4.1 to 4.6 of the SoP. The PRA expects to announce the SRB rates resulting from its assessment by 15 December of each year and to require instructions to apply them on an ongoing basis by 1 January of the second year following the calendar year when the rates were announced. For example, the SRB rates announced in December 2019 would take effect as of 1 January 2021. The PRA may adapt this timeline, where appropriate, in light of its objectives and statutory responsibilities.
Finally, the PRA notes its responsibility for deciding whether EEA SRB rates should be reciprocated from 1 January 2019. The PRA will make such deductions on a case-by-case basis. When doing so, the PRA will take into account the information set out in the relevant notification submitted by the EEA authority, as well as the materiality and effect of any decision to the UK financial system and PRA regulated firms.
View PRA’s approach to the implementation of the systemic risk buffer, 5 December 2016