March 2019 Regulation Update

Pillar 2A Capital Framework

A few changes have been proposed to the framework. It is understood that assessment of a firm’s Pillar 2A capital, under the standardised approach (SA) to credit risk, includes a comparison of the risk weighted exposure under (SA) to an internal ratings based (IRB) average.

It is proposed that changes to the IRB benchmark risk weights be limited, in order to avoid possible volatility in the capital requirements of SA firms.  The PRA has suggested use of benchmarks that are averaged over several years. Therefore movements in the benchmarks would be spread over time.

In addition to the above, in assessing the minimum amount of Pillar 2A capital required to cover potential losses from a severe but plausible stress, the PRA has proposed that the level not be based on Total Risk Exposure Amount movement. According to a recent consultation paper (5-19), the minimum should be related to expected changes in parameters that are relevant to the particular Pillar 2A risk.  Firms may want to incorporate this approach into their ICAAP, but obviously this is just a proposal at this time.

If accepted, the changes will be effective from 1st October 2019.

UK Withdrawal from the European Union (EU)

The PRA issued a policy statement (PS 5-19) that is applicable to all banks and building societies. The contents are effective from the date that the UK leaves the EU. A transitional relief period will be introduced.

In simple terms, this relief will mean the following:

  • Credit ratings available from EU agencies before exit date (and still provided from the agency immediately after exit) can be used for twelve months.
  • EU exposures will be subject to the same treatment as under the CRR (credit risk, large exposures, leverage, liquidity coverage).
  • EBA reporting (COREP, FINREP, ALMM, etc.) will continue. Any references on templates should be interpreted as currently, until they are changed to the UK equivalent in due course.

The above will apply for fifteen months after exit, except for credit ratings (only twelve months).

European Banking Authority (EBA) – Validation Rules

The EBA issued a revised list of validation rules that includes deactivations affecting some FINREP and COREP forms with effect from 8 March 2019. Wires now has the appropriate changes in place.

Further details are available in: https://eba.europa.eu/-/eba-issues-revised-list-of-validation-rul-2

Derogated Stable Deposits

Whistlebrook understands that firms will not be able to class retail deposits in the UK as ‘derogated’. This classification commenced in January 2019 and has a standard outflow in COREP LCR of 3%.

IFRS 9 Loss Allowance Transitional Add Back

According to a paper issued by the European Parliament (12 December 2017), the scaling factor applied to the transitional add back related to IFRS 9 expected loss provision is 85% for accounting years starting on or after 1 January 2019. The factor will reduce to 70% in 2020.

Resolution Z Templates

The first submission of the Z templates is due by 31st May 2019. Whistlebrook understands that all firms are required to make submissions. The relevant forms are in Wires.

Next Release of Wires

The next release is currently planned for 10th May 2019.