Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Prudential Regulator Consults on Reflecting the Systemic Risk Buffer Framework Within the Leverage Ratio Framework for UK Systemic Ring-Fenced Bodies
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  • UK Prudential Regulator Consults on Reflecting the Systemic Risk Buffer Framework Within the Leverage Ratio Framework for UK Systemic Ring-Fenced Bodies
    The U.K. Prudential Regulation Authority has published a consultation paper entitled "UK leverage ratio: Applying the framework to systemic ring-fenced bodies and reflecting the systemic risk buffer."

    The Systemic Risk Buffer is one of the elements of the overall capital framework for U.K. banks and building societies. It is applied by the PRA to individual institutions and will be introduced at the same time that ring-fencing comes into force in 2019. SRB institutions are banks falling within the definition of Ring-fenced Bodies in the Financial Services and Markets Act 2000 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).

    The Bank of England's Financial Policy Committee issued a Policy Statement in 2015 which provided that domestic systemically important banks would be subject to a leverage ratio buffer that complements their risk-weighted capital requirements from 2019.

    The FPC finalized the framework for the SRB in 2016. On publishing the SRB framework, the FPC announced that it "anticipates that the leverage ratio will be applied to U.K. G-SIBs and other major U.K. banks and building societies at the level of the RFB subgroup from 2019 (where applicable), as well as on a consolidated basis." The PRA must amend the U.K. leverage ratio framework to reflect the SRB framework in line with the FPC's intention.

    The PRA's consultation is relevant to firms in scope of the U.K. leverage ratio framework that are also SRB institutions, or part of a group containing an SRB institution. The consultation paper seeks feedback on the PRA's proposals to:
    • apply the U.K. leverage ratio framework on a sub-consolidated basis to RFBs in scope;
    • amend the Additional Leverage Ratio Buffer to reflect the SRB; and
    • where applicable, expect firms to hold capital on a group consolidated basis to address RFB group risk (this is known as the Leverage Ratio Group Add-on).

    The proposals will require the PRA to update the Leverage Ratio, Public Disclosure, Reporting Leverage Ratio, and Ring-fenced Bodies Parts of the PRA Rulebook. It will also need to update its supervisory statements "The UK leverage ratio framework" and "UK leverage ratio: instructions for completing data items FSA083 and FSA084." An update will also be required to the FSA083 Leverage Ratio Reporting template and instructions.

    In its financial stability report of June 2018, the FPC announced that it intends to carry out a comprehensive review of the leverage ratio framework in light of revised international standards, including Basel III and proposed revisions to the Capital Requirements Regulation. The proposals in the PRA consultation may be revisited at a later date depending on the outcome of that review.

    Comments on the consultation are invited by September 25, 2018.

    View the consultation paper (PRA CP 14/18).

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