29 November 2013

PRA sets out key decisions on capital standards

The largest UK banks will have to comply with tougher capital rules five years ahead of an international timetable, as the Bank of England seeks to bolster lenders' resilience to crises.

The Prudential Regulation Authority (PRA) is announcing key decisions on capital standards ahead of the introduction of a new European capital regime next year. These decisions will enhance the stability of the financial sector and strengthen the capital regime in the UK. Alongside this, the PRA has set out its capital and leverage expectations for the major UK banks and building societies that were included in the 2013 capital exercise, from 2014 onwards.

In August, the PRA published a consultation paper which set out proposals dealing with the implementation of the new European capital regime - the Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR). Although the PRA has not finalised all aspects of the rules, it is setting out a number of key decisions in order to give firms clarity on the key policy issues that affect the minimum level of Common Equity Tier 1 (CET1) capital which firms need to maintain.

Specifically, the PRA has confirmed the minimum Pillar 1 capital requirements for firms and the dates from which they apply. The PRA will require firms to meet a 4 per cent Pillar 1 CET1 requirement in 2014, rising to 4.5 per cent from 1 January, 2015. Similarly, during the same period the required Pillar 1 Tier 1 capital ratio will be 5.5 per cent, rising to 6 per cent from 1 January 2015 onwards. Total Pillar 1 capital remains at 8 per cent.

Supervisory statement on capital and leverage ratios

The PRA has decided to change the existing capital regime for the major UK banks and building societies to bring it into line with the capital and leverage requirements set out following the capital review undertaken earlier this year. These standards were published in June 2013. From 1 January 2014, the PRA will no longer monitor the capital position of major UK banks and building societies using the 4/6/8 capital framework which was introduced in 2008 and used the definition of capital developed at that time by the Financial Services Authority.

The PRA will expect the major UK banks and building societies to meet a 7 per cent CET1 capital ratio and a 3 per cent Tier 1 leverage ratio – after taking into account adjustments to risk-weighted assets (RWAs) and CET1 capital deemed necessary by the PRA – from 1 January 2014. These firms will be expected to maintain a 3 per cent Tier 1 leverage ratio under the definition set out in the CRR. This standard will be reviewed in 2014 once Basel and CRR leverage ratio definitions are finalised.

Full press release

Statement on CP5/13 - Strengthening capital standards: Implementing CRD IV 

Capital and leverage ratios for major UK banks and building societies

© Bank of England