On May 26, the Financial Policy Committee published the final UK framework for the Systemic Risk Buffer for ring- fenced banks and large building societies (i.e. those that will be subject to the UK ring-fencing rules from 2019 with assets over £25 billion). The SRB, a discretionary buffer under the EU Capital Requirements Directive, aims to mitigate and prevent long-term non-cyclical macro-prudential or systemic risk.
The SRB rate will be calibrated according to a firm’s total Risk-Weighted Assets so that firms with RWA: (i) less than £175 billion will have a 0% SRB; (ii) between £175 and £320 billion will have a 1% SRB; (iii) between £320 and £465 billion will have a 1.5% SRB; (iv) between £465 and £610 billion will have a 2% SRB; (v) between £610 and £755 billion will have a 2.5% SRB; and (vi) over £755 billion will have a 3% SRB.
The Prudential Regulation Authority is responsible for implementing the SRB and will consult later this year on its proposals for this. The PRA must decide upon the basis of application of the SRB—individual, sub-consolidated or consolidated. In October 2015, the PRA consulted on implementation of the ring-fencing rules and proposed a sub- consolidated basis where a ring-fenced sub-group is in place. In addition to choosing the level of application, the PRA must apply the FPC’s methodology and set a buffer rate. However, the regulator may exercise its judgment when setting the SRB rate for individual firms and may also waive the SRB. The FPC has recommended that the PRA ensures that there is sufficient capital within a consolidated group that includes a ring-fenced bank to address both global and domestic systemic risks.
The PRA will apply the SRB to individual firms from 2019, which is when the ring-fencing rules will become applicable. The PRA is expected to publish its policy statement, final rules and supervisory statements on the ring- fencing requirements by mid-2016.
Firms subject to the SRB will also be subject to a 3% minimum leverage ratio requirement as well as an additional leverage ratio buffer of 35% of the applicable SRB rate. The SRB is expected to add about 0.5% of RWAs to the equity requirements of UK systemic banks.
The FPC’s SRB framework is available at: