What is the capital adequacy framework that applies to banks?
UK banks are subject to capital adequacy requirements. UK banks are required to maintain a level of regulatory capital that is calculated according to each bank's total risk exposure amount. A firm's total risk exposure amount is the sum of its credit risk, operational risk, market risk and credit valuation adjustment risk.
Regulatory capital comprises:
- Common Equity Tier 1 (CET1) capital (equity).
- Additional Tier 1 (AT1) capital (equity-like hybrid instruments, such as preference shares and some subordinated debt instruments).
- Tier 2 (T2) capital (highly subordinated debt and/or instruments with a maturity of at least five years).
Banks are required to maintain:
- Tier 1 capital (CET1 and AT1 instruments combined) of at least 6% of the total risk exposure amount.
- CET1 capital of at least 4.5% of the total risk exposure amount.
- A base regulatory capital of at least 8% of the total risk exposure amount (the Pillar 1 minimum capital requirements).
In addition to the Pillar 1 regime, banks must also comply with the Pillar 2A, CRD buffer and Pillar 2B capital requirements, as applicable. Pillar 2A requirements cover risks not addressed under Pillar 1 capital requirements against which banks must hold capital. The CRD buffers comprise a capital conservation buffer and a countercyclical capital buffer, which are relevant to all firms, for G-SIIs, a G-SII buffer and for O-SIIs, an O-SII systemic risk buffer. Pillar 2B is a PRA-set requirement for additional regulatory capital to enable a bank to withstand a severe stress event.
What liquidity requirements apply?
All UK incorporated banks are subject to high-level, qualitative and quantitative liquidity requirements. Branches of foreign banks are subject to high-level requirements only. Detailed common reporting requirements also apply. All banks are subject to PRA Fundamental Rule 4, which requires a firm to maintain adequate financial resources. The qualitative requirements for UK banks focus on governance and senior management oversight of liquidity risk, measurement and management of liquidity risk, stress testing and contingency funding plans. The quantitative regime for UK banks implementing the Basel III liquidity coverage ratio (LCR) derives from the EU Delegated Regulation EU 2015/61. This ensures that banks hold a buffer of unencumbered high quality liquid assets to meet liquidity needs under a 30-day stress scenario. The reporting regime requires UK banks to provide liquidity data to the PRA, including:
- Daily liquidity reports.
- Weekly mismatch reports.
- Weekly pricing data.
- Monthly marketable assets reports.
- Monthly funding concentration reports.
- Quarterly retail funding reports.
- Quarterly systems and controls questionnaires.
All UK-authorised banks are subject to the "overall liquidity adequacy rule", that is, they must be self-sufficient in terms of liquidity adequacy. Banks are also subject to an individual liquidity adequacy process (ILAAP) which requires them to identify, measure, manage and monitor liquidity and funding risks across different timeframes and stress scenarios, consistent with the risk appetite established by the firm's management body. As part of this process, banks must complete an ILAAP document at least annually as part of the supervisory liquidity review process, following which the PRA may issue individual liquidity guidance on the quantity of the bank's liquid asset buffer and its funding profile.
Article 8 of the UK CRR recognises that in certain circumstances it can be appropriate for banks to rely on liquidity resources of other group members, subject to conditions on unhindered transferability of liquidity resources within the UK sub-group. This allows the PRA to waive all or part of the UK CRR liquidity rules at a solo level in relation to UK banks and their UK subsidiaries, with the result that the rules instead apply at the level of the UK group (or sub-group).
The second component of the Basel III liquidity standards is the Net Stable Funding Ratio (NSFR), which is intended to complement the LCR in requiring banks to maintain adequate sources of stable funding to withstand conditions of extended stress over a one year period. The PRA has implemented the NSFR in the UK with effect from 1 January 2022. Consistent with the Basel standards, the NSFR is the ratio of the following:
• An institution's amount of available amount of stable funding.
• Its amount of required amount of stable funding over a one-year period.
What leverage requirements apply?
The UK leverage ratio framework requires UK systemic banks to satisfy a minimum Tier 1 leverage ratio of 3.25%. The leverage ratio is determined by dividing a bank's Tier 1 capital by its total exposure measure (as defined in Article 429(4) of the UK CRR).
Banks subject to the leverage ratio requirement are also subject to the applicable reporting standards imposed by the PRA.
The UK has also made provision for the application of various leverage ratio buffers, including a countercyclical leverage buffer and institution-specific leverage buffers for RFBs and G-SIIs.
Following a consultation in 2021, the UK leverage ratio framework has been amended to align it with the Basel standards from 1 January 2022. The framework will be extended to capture a wider array of banks within its scope from 1 January 2023.
Role and Requirements
What is the role of consolidated supervision of a bank in your jurisdiction and what are the requirements?
Role
As consolidated supervision in the UK is ultimately derived from the principles and standards of the Basel Committee on Banking Supervision (BCBS), it performs the same role in the UK as it does elsewhere: to ensure that prudential supervision of a bank looks to the strength of the bank's group, and not just the bank itself.
Requirements
The UK CRR rules define the scope of a group and the prudential requirements that apply to it and set out the calculations of both group capital requirements and group capital resources. Capital and liquidity requirements are set and reporting is made at the level of the relevant consolidated group (or sub-group) as well as the particular entity within the group. RFBs which are members of ring-fenced sub-groups are subject to consolidated supervision of the ring-fenced sub-group.
What reporting requirements apply to the acquisition of shareholdings in banks?
Under section 178 of the FSMA, a person or entity that decides to acquire or increase control over a UK-authorised bank must give the PRA notice in writing before making the acquisition and (in the case of acquiring or increasing control) must await the positive consent of the PRA (or the expiry of the statutory assessment period of 60 working days) before making the acquisition. For these purposes, 'control' can be defined in terms of shareholding and/or voting power (including equivalent concepts for non-corporate entities such as partnerships).
A person (A) acquires control when the person holds 10% or more of the shares or voting power in an authorised person (B) or a parent of B (P), or shares or voting power in B or P as a result of which A is able to exercise significant influence over the management of B. Within the scope of "control" are indirect control, that is, control that A has through one or more intermediate holding companies between A and B, and situations where A is acting in concert with another person.
A increases control over B whenever A reaches or crosses the 20%, 30% or 50% threshold or where A becomes a parent undertaking of B (A holds or controls a majority of the voting rights in B, or A is a shareholder and has the right to appoint/remove a majority of B's board or A has the right to exercise dominant influence over B). Reduction in control between these thresholds or ceasing to have control also generate written notification obligations to the PRA. Failure to comply with the statutory notification requirements in connection with changes in control is a criminal offence.
Where a bank's shares are listed or have been admitted to trading on a regulated market (for example, the main market of the London Stock Exchange), a person whose holding of voting rights in the bank reaches, exceeds or falls below any full percentage level of 3% or above (3%, 4%, 5% and so on) must notify that bank.
