On July 29, 2015, the Prudential Regulation Authority published the following documents on Pillar 2 Capital Requirements: (i) a Policy Statement on assessing capital adequacy under Pillar 2; (ii) a Statement of Policy on the PRA’s methodologies for setting Pillar 2 capital, which includes details on the increased transparency of the PRA's supervisory approach under Pillar 2; (iii) a Supervisory Statement on Pillar 2 reporting which includes instructions for completing and reporting data items, guidance on the terms used and the PRA's expectations of firms for Pillar 2 reporting; and (iv) a Supervisory Statement on the Internal Capital Adequacy Assessment Process that must be undertaken by firms and the Supervisory Review and Evaluation Process conducted by the PRA. The documents are applicable to banks, building societies and PRA-designated firms. Pillar 2 aims to ensure that firms have sufficient capital to cover potential risks not sufficiently addressed in the prescriptive Pillar 1 requirements. The Pillar 2 framework enters into force on January 1, 2016. The PRA aims to ensure that approaches are consistent and proportionate across firms to enhance effective competition between firms. The PRA's Policy Statement on assessing capital adequacy under Pillar 2 contains feedback received on its consultation paper of January 2015 on proposals to enhance transparency and accountability in setting Pillar 2 capital requirements. The Policy Statement explains that firms must carry out an ICAAP in accordance with the PRA's rules and it is not sufficient to only replicate the PRA's methodologies as the ICAAP is the responsibility of a firm's management body. Firms must have sound and effective processes in place to cover the risks to which they may be exposed. The Supervisory Statement on the ICAAP and SREP expands on the PRA's expectations of firms when undertaking an ICAAP and sets out the process that the PRA will follow when carrying out the SREP and assessing a firm's ICAAP.
The PRA documents are available at: http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps1715.pdf; http://www.bankofengland.co.uk/pra/Documents/publications/ss/2015/ss3115.pdf; http://www.bankofengland.co.uk/pra/Pages/publications/ss/2015/ss3215.aspx; and http://www.bankofengland.co.uk/pra/Documents/publications/sop/2015/p2methodologies.pdf.