On 12 February 2025, the UK Prudential Regulation Authority (PRA) issued a policy statement on streamlining firm-specific capital communications (the Policy Statement).1 The statement finalises policy that was the subject of a September 2024 PRA consultation.2 The Policy Statement introduces changes intended to simplify the processes and communications related to firm-specific capital requirements, specifically concerning Pillar 2A capital, systemic buffers and the additional leverage ratio buffer (ALRB), and amends some respective PRA rules and existing supervisory statements.
Background
To understand the impact of the policy statement, clarifying some of the key regulatory capital terms used is helpful:
- Pillar 2A capital is an additional capital requirement set by the PRA to cover firm-specific risks that are not fully addressed by Pillar 1 capital, which would usually be used to cover standard risks such as operational, market and credit risk. Pillar 2A capital will usually be held against concentration risk, counterparty risk and interest-rate risk in the banking book. The Pillar 2A requirements for a firm are determined through the regular Supervisory Review and Evaluation Process (SREP) between the PRA and the firm, and will vary depending on the risk profile of the institution.
- Systemic buffers are additional capital buffers imposed on banks that are systemically important to the financial system, e.g., the global systemically important bank (G-SIB) buffer and the other systemically important institution (O-SII) buffer, which are designed to ensure the resilience of major banks at times of financial stress.
- The ALRB is a capital requirement for large banks, designed to prevent excessive leverage. Unlike risk-weighted capital requirements, which measure capital requirements based on the risk profile of assets, the ALRB requires a minimum ratio between capital and total exposure.
- Maximum distributable amount (MDA) restrictions limit a firm’s ability to pay dividends, variable remuneration and AT1 instrument coupons when capital levels fall below relevant regulatory buffer requirements.
Takeaway Points
The two key takeaways from the Policy Statement are as follows:
- Pillar 2A and the systemic buffers are now specifically included, when set, in the rules for capital conservation and MDA restrictions. Currently, the relevant rules only reflect Pillar 1 capital as a minimum requirement and the regulatory framework is modified for firms with Pillar 2A and systemic buffer requirements through other means. This will help improve clarity on the interplay between Pillar 2A and systemic buffer capital requirements and the capital conservation and MDA restrictions, in particular because the rules are now more self-contained.
- Regarding ALRB requirements, these are currently calculated and communicated separately to firms by the PRA. Under the changes made by the Policy Statement, the methodology for calculating the ALRB will now be set out in PRA rules. Again, this will help improve clarity for banks.
Impact for Firms
The new rules are set to take effect on 31 March 2025. Firms are not required to undertake specific actions for implementation; instead, the PRA will incorporate the changes during each firm’s subsequent Pillar 2A capital reset following the effective date.
The streamlined approach introduced by the Policy Statement simplifies the capital-setting process for both banks and the PRA. While the changes do not alter capital requirements for firms, they do help to reduce administrative burdens and improve clarity around firm-specific capital rules.
Firms should review the changes to the PRA Rulebook and supervisory statements to ensure they understand how these changes impact their regulatory reporting and capital planning requirements.
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1 See the Bank of England’s PS2/25.
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