Shearman & Sterling LLP | FinReg | UK Prudential Regulation Authority Sets Out 2019 Systemic Risk Buffer Rates
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  • UK Prudential Regulation Authority Sets Out 2019 Systemic Risk Buffer Rates
    The Prudential Regulation Authority has released its first systemic risk buffer rates, which will apply from August 1, 2019. The rates determine the amount of additional regulatory capital which must be held by "systemic risk buffer institutions" (i.e. U.K. financial institutions which have been deemed to be systemically important). In scope firms are the so-called "ring-fenced bodies" within the meaning in the Financial Services and Markets Act 2000 and include large building societies holding more than £25bn in deposits. The buffer applicable to each institution is intended to reflect the relative costs to the U.K. economy if the institution in question were to fall into distress.

    The introduction of these rates springs from widespread reforms to bank regulatory capital recommended by the Independent Commission on Banking (the so-called "Vickers commission") following the 2007-2008 financial crisis. Amongst those recommendations, the ICB proposed the ring-fencing of systemically important banks in the U.K. along with a requirement on such banks to hold higher levels of regulatory capital. The U.K. ring-fencing regime has applied since January 1, 2019. The Financial Policy Committee was made responsible for establishing an enhanced regulatory capital framework (which will be reviewed every two years) to govern this topic. The PRA was charged with setting out systemic risk buffer rates based on the FPC's framework.

    The PRA has assigned each relevant institution a "systemic score", representing its total assets held at the end of the previous calendar year and used this to calculate the applicable systemic risk buffer rate. It has also based the rates applicable to ring-fenced banks on bank "sub-groups", which capture only certain entities within those institutions. The ring-fenced banks subject to the rates are sub-groups of Lloyds Banking Group, Royal Bank of Scotland, Barclays, HSBC and Santander UK. Nationwide Building Society is currently the only building society to which the rates apply. Rates for all institutions fall between 1-2%, meaning institutions must hold additional Common Equity Tier 1 capital in an amount equal to 1-2% of worldwide risk-weighted assets of the building society or bank sub-group in question. The PRA may also apply an additional buffer if it determines there is insufficient capital held at a consolidated group level for ring-fenced banks, taking into account any global systemic risk buffers which may or may not have been imposed. Going forward, the PRA intends to announce the SRB rate by December 15 of each year, to be effective by January 1 of the second following year (meaning rates announced in December 2019 will be effective from January 1, 2021).

    View the PRA's systemic risk buffer rates.

    View details of the FPC's framework and PRA's approach to implementation of the systemic risk buffer

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