On February 12, 2021, the Prudential Regulation Authority (PRA) released a consultation paper (CP5 / 21) on the implementation of Basel III standards into UK law (CP). This is PRA’s first major publication after the end of the Brexit transition period. The draft rules are generally closely aligned (but not identical) with the corresponding requirements of the EU CRR II.
Stakeholders can provide their comments to the Consultation by Monday, May 3, 2021.
CRR II implements the other Basel III standards (which were not covered by the Capital Requirements Regulation (EU) No. 575/2013 (CRR)) in EU law. However, since most of the provisions of CRR II enter into force on June 28, 2021 (i.e. after the end of the Brexit transitional period), they have not been transposed into UK law. Instead, the other Basel III standards will be implemented into UK law through the Financial Services Bill, which will give the PRA the power to adopt the relevant rules.
In general, the PRA has used CRR II as the initial basis for the UK framework, but also proposes to take a different approach where deemed necessary in order to achieve closer alignment with Basel III standards, to improve proportionality of the UK regime and ensure consistency with existing UK rules. Essentially, the new UK prudential framework will apply from 1 January 2022.
The consultation does not cover changes to the UK leverage ratio regime, which will be considered separately by the Financial Policy Committee (FPC) and the Prudential Regulatory Committee (PRC).
Overview of the main proposals
- Definition of capital / deduction of CET1 software assets: One of the main points of divergence between the EU and the UK concerns the capital treatment of certain software assets. As a general rule, under Basel III standards, “intangible assets” should be deducted from Common Equity Tier 1 (CET1) capital, on the grounds that they are not sufficiently absorbed by losses on a going concern basis. operation. EU CRR II rules exclude certain software assets from the CET1 deduction requirement. The ARP has already expressed concerns about the EU’s approach. Therefore, the draft UK rules require that all intangible assets (including software assets that qualify as intangible assets under the International Financial Reporting Standard (IFRS) or applicable accounting standards) be fully deducted from CET1, without exception. The PRA intends to implement the relevant changes as soon as possible.
- Counterparty credit risk: The PRA proposes to introduce a new standardized approach for measuring counterparty credit risk exposures (SA-CCR) for companies that are not allowed to use the internal model method (IMM) and a revised framework for them. corporate exposures to central counterparties (CCPs). The PRA also proposes to introduce a simpler and more conservative SA-CCR approach for certain small businesses. This is part of a series of draft measures aimed at making the UK prudential framework more proportionate, in particular for small establishments.
- Market risk: The Consultation includes changes to the trading book requirements, in particular with respect to prudent valuation requirements. In addition, the PRA proposes to modify the conditions of eligibility for the exemption for small trading portfolio companies by increasing the relevant thresholds, thus allowing more companies with limited trading activities to be exempted from certain requirements. in terms of market risk. In particular, the PRA proposes to replace the relevant thresholds of the EU CRR with a threshold of 5% of a company’s total assets and an absolute threshold of GBP 44 million (which is more than twice as high than the current absolute threshold of the EU).
- Operational risk: The draft rules aim to clarify certain ambiguities identified with regard to the calculation method used for the basic indicators approach (BIA), in particular by explaining the treatment of rental assets.
- Major exhibitions: PC is implementing the revised Basel III large exposures framework, which will generally be aligned with the relevant CRR II framework.
- Liquidity rules: In addition to implementing the Basel III Stable Net Funding Ratio (NSFR) standards, the draft rules introduce a simplified (but at least as conservative) version of the NSFR that non-complex small businesses can choose to apply . Regarding the liquidity coverage ratio (LCR), the PRA intends to reproduce the relevant requirements of the CRR and the relevant delegated acts in the rules of the PRA, but also to clarify some definitions.
- Exposures to collective investment undertakings (UCI): The draft rules revise the prudential requirements applicable to UCI exposures by introducing an updated hierarchy of approaches to determine the relevant capital requirements: (i) a revised analytical approach (LTA), which can be used when a the company has sufficient information on the underlying exposure of the UCI and the information is verified by a third party; (ii) a mandate-based approach (MBA) and (iii) a fall-back approach (FBA) which can be used when LTA and MBA are not feasible and under which a risk weight of 1250% s’ would apply. The PRA aims to allow companies to apply a combination of the three approaches to their UCI exposures, provided that the relevant conditions for their use are met.
- Monetary denomination of thresholds and monetary values: As a general rule, the PRA intends to redefine the thresholds and currency values included in the proposed PRA rules from Euros (EUR) to Pound Sterling (GBP) (with the exception of the thresholds for disclosing the number of persons who receive remuneration of EUR 1 million or more per financial year).
- Updates to supervision reports: Among other things, the PRA proposes to update the UK version of COREP and FINREP and intends to use version 3.0 of the European Banking Authority (EBA) reporting taxonomy as a basis, which also recently updated in light of Basel III standards.
- Pillar 3 disclosure: The relevant proposals aim to align UK business Pillar 3 information with the relevant Basel III requirements and to improve the comparability, quality and consistency of business regulatory information.