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Refining the PRA’s Pillar 2A capital framework

Last updated: 31 May 2017

Consulting body:
Prudential Regulation Authority
Period of consultation:
Runs from 24 February 2017 to 31 May 2017
CML action:
Response submitted

The PRA have published their consultation paper Refining the PRA’s Pillar 2A capital framework.

It sets out proposed adjustments to the PRA’s Pillar 2A capital framework.  The aim of the PRA’s proposals is to make the PRA’s Pillar 2A capital assessment both more robust and proportionate by addressing some of the concerns over the differences between SA and IRB risk weights and by strengthening and updating the calibration of the IRB benchmark.

The PRA is proposing to refine its Pillar 2A approach for firms using the standardised approach (SA) for credit risk.  

In particular, the PRA may exercise its supervisory judgement to adjust a firm’s Pillar 2A add-ons, as assessed by applying the PRA’s methodologies, to ensure that the total amount of capital required to be held does not exceed the amount necessary to ensure a sound management and coverage of its risks.

IFRS 9 will apply for accounting periods beginning on or after 1 January 2018.  

The PRA is also proposing to consider, as part of the supervisory review and evaluation process (SREP), the extent to which expected credit losses (ECL) in IFRS 9 may already be covered by the SA Pillar 1 capital charge.

Finally, the PRA is consulting on an update to its credit risk benchmark (the ‘IRB benchmark’) which is part of the Pillar 2A credit risk methodology, and on amendments to the Pillar 2 reporting rules.

The proposed implementation date for the updated Pillar 2A capital framework is 1 January 2018.

CML response

Overall, we welcome the overarching methodology behind the proposed changes. In our view, the three capital pillars are inter-connected and dynamic.

It therefore, in our opinion, makes considerable sense that as risks are identified and captured in, for example, Pillar 1, then the need for capital buffers in Pillar 2, are reduced.

Download the full CML response below.