UK Prudential Regulation Authority Finalizes Policy on Groups and Double Leverage

The U.K. Prudential Regulation Authority has published a Policy Statement setting out its proposals to amend the Groups policy framework it has in place for the application of prudential standards to firms on an individual and consolidated basis within banking groups.

The PRA consulted between October 2017 and January 2018 on proposals to enable: (i) assessment and mitigation of the risks to group resilience due to the use of "double leverage" (which occurs when one or more parent entities in a group funds some of the capital in its subsidiaries by raising debt or lower forms of capital externally); (ii) assessment and mitigation of the risks highlighted by prudential requirements applied by local national regulators on overseas subsidiaries of U.K. consolidation groups; and (iii) improved monitoring of the distribution of financial resources across different group entities.

Following feedback received, the PRA has made three changes to the proposals, which it does not consider to be significant changes. The first and second changes affect the PRA Supervisory Statement, "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" by: (a) changing the definition of "double leverage" so that it is accounting based to reflect the reporting practices of stand-alone holding companies; and (b) clarifying the level of application of the double leverage formula. The third change affects the PRA Statement of Policy, "The PRA’s methodologies for setting Pillar 2 capital" by amending the formula for double leverage.

The changes are set out in:

• an amendment within the Internal Capital Adequacy Assessment part of the PRA rulebook;
• an update to PRA Supervisory Statement, "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)";
• an update to PRA Statement of Policy, "The PRA’s methodologies for setting Pillar 2 capital"; and
• an update to PRA Supervisory Statement, "The PRA’s approach to supervising funding and liquidity risks".

The PRA rulebook change, updated Supervisory Statements and updated Statement of Policy will all take effect on January 1, 2019. The PRA recommends that, where practical and applicable, firms should continue to aim to incorporate the policy proposals in their ICAA and Individual Liquidity Adequacy Assessment (ILAA) submissions ahead of full implementation.

View the Policy Statement (PS9/18).

View the updated Supervisory Statement on ICAAP and SREP (SS31/15)

View the updated Statement of Policy on the PRA's methodologies for setting Pillar 2 capital.

View the updated Supervisory Statement on liquidity and funding risks (SS24/15).