Shearman & Sterling LLP | FinReg | UK Prudential Regulator Publishes Q&A on Use of Liquidity and Capital Buffers During COVID-19
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  • UK Prudential Regulator Publishes Q&A on Use of Liquidity and Capital Buffers During COVID-19
    The U.K. Prudential Regulation Authority has published a Q&A guide on how banks should use their capital and liquidity buffers during the COVID-19 crisis. The PRA and Financial Policy Committee have stressed the important role that banks must play in providing liquidity to the economy in the wake of the pandemic, using all tools at their disposal, including the buffers built up in the years since the 2007-2009 financial crisis.
    The guide makes clear that banks are expected to utilize their liquidity buffers to service customers during the COVID-19 crisis, even if that means liquidity coverage ratios dip significantly below 100%. Banks should also use the Bank of England’s lending facilities (including the indexed long-term repo operations, the Discount Window Facility, the Term Funding Scheme and the Contingent Term Repo Facility) to manage their liquidity risk. Banks are expected to notify the PRA if their liquidity buffers are, or are expected to be, below that which is normally required, but a reduction in banks’ LCRs will not automatically trigger restrictions and the PRA will give banks time to restore buffers once the fallout from COVID-19 has subsided.
    The guide also confirms that, as at December 31, 2020, U.K. banks’ capital ratios were over three times higher than at the start of the financial crisis. All elements of the capital buffers may be used by banks to support the economy through a downturn triggered by COVID-19.
    View the PRA's Q&A guide on Liquidity and Capital Buffers.
    Details of other regulatory responses to COVID-19 are available at our COVID-19 Research Center.

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