As you will no doubt be aware, the Prudential Regulation Authority (PRA) consulted in detail on implementing the Capital Requirements Directive IV and Regulation (CRD IV / CRR) into UK law in Consultation Paper 5/13, and finalised its rules in Policy Statement 7/13 (see Edition 6 of this Briefing for an in-depth summary and Edition 8 for a review of the securitisation aspects of the framework), with the rules now in effect as from 1 January 2014, subject to phase-in and other transitional arrangements. CP 5/13 included a consultation on the specific topic of "capital buffers", and this PRA Policy Statement 3/14 (PS 3/14) contains feedback on that consultation and contains the final rules which implement the capital buffers requirements of CRD IV (i.e. the provisions which allow (or require) Member States to require banks to hold additional capital above the minimum level, to cover specific periods of stress, or specific risks). These buffers are "add-ons" to the minimum capital requirements, and are being phased-in over a period of some years, until 2019. The relevant capital buffers, and the PRA's proposals for their implementation in the UK, are as follows:

  • Countercyclical capital buffer (CCB): the "simplest" of the Basel III/CRD IV buffers, the CCB must be held in the form of common equity to provide a 'buffer' of capital that can absorb losses during future periods of stress. The CCB requires implementation from 1 January 2016 (at a rate of 0-2.5% of RWAs, depending on national buffer rates, but the PRA plans to set no cap on this buffer for UK banks).

  • Capital conservation buffer: another simple buffer which comes directly from Basel III, the capital conservation buffer restricts dividend and other payments if a bank's capital ratio falls below the required minimum (hence it is an "individual bank" requirement as opposed to a systemic one). The capital conservation buffer starts at a rate of 0.625% of risk-weighted assets (RWAs) from 1 January 2016, increasing to 2.5% by 1 January 2019.

  • G-SII/G-SIFI/G-SIB buffer: you may be aware that additional capital buffers are required to be held by "global systemically important firms/banks/institutions" (known as G-SIIs, G-SIBs or G-SIFIs depending on which international regulator you ask!). National regulators (i.e. the PRA in the UK) must set this buffer, which will be phased-in from 2016-2019, and the PRA will base its G-SII methodology on detailed technical standards still to be prepared by the European Banking Authority.

  • O-SII buffer: the PRA will be responsible for identifying "other systemically important institutions" (O-SIIs) from 1 January 2016. The PRA will consult on and set out its policy for identifying O-SIIs in 2015. However, the PRA and HM Treasury have already decided that O-SIIs will not be subject to an O-SII buffer (at this stage).

  • Systemic risk buffer (SRB): this is a CRD IV-specific buffer (not referenced in Basel III) which is a temporary buffer, referred to in the UK as a "sectoral capital buffer" (SCB). The UK will apply the SRB/SCB (of up to 3% of Common Equity Tier 1) from 1 January 2015 (under direction from the Bank of England's Financial Policy Committee, although no authority has yet been designated as responsible for the SRB), but will use its discretion in whether to apply it, and then only in circumstances in which excess credit growth needs preventing - such as a "bubble" arising in the housing market.

Together, the countercyclical capital buffer, capital conservation buffer, G-SII buffer and the systemic risk buffer (if applicable) are to be combined and are referred to by the PRA as a banks' "combined buffer" (not all Member States will necessarily do this, so European banks will not all have to meet the same requirement(s) at the same time). UK banks that do not meet their combined buffer will face restrictions on their distributions and be subject to a so-called "maximum distributable amount", and will have to prepare a detailed capital conservation plan outlining how it will increase capital ratios and own funds. The PRA is to provide further details of how it intends to implement and apply these buffers during 2014 and beyond.

Useful links

PRA Policy Statement 3/14