2.1 FPC statement from 20 September 2017 meeting On 25 September 2017, the Bank of England's Financial Policy Committee FPC) published a statement following its 20 September 2017 meeting. At the meeting the FPC reviewed developments since its meeting on 21 June 2017.
Among other things, the FPC discussed:
- consumer credit: although the overall credit quality of consumer credit has improved significantly since the financial crisis, the FPC judges that lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestimating the losses they could incur in a downturn. The FPC has responded to this risk by accelerating its analysis of credit losses that banks could incur in the very deep recession encapsulated in the 2017 annual stress test scenario. Regulatory capital buffers for individual firms will be set following the full stress test results so that each bank can absorb its losses on consumer lending, alongside all the other effects of the stress scenario on its balance sheet. The FPC also expects that banks will begin to factor these market-wide levels of stressed losses on consumer credit into their overall lending and capital plans;
- Brexit: the FPC continues to assess the risks of disruption to financial services arising from Brexit so that preparations can be made and action taken to mitigate them. In areas where it would be complex and difficult for firms themselves to mitigate risks fully, such as the continuity of contracts between UK and EU27 counterparties, the FPC is exploring other mitigating actions. This applies most notably to uncleared derivative contracts between UK and EU27 counterparties, which account for around a quarter of outstanding contracts and involve tens of thousands of counterparties. It also applies to the cross-border sharing of personal data;
- bank capital: on 1 January 2018, most UK banks will need to adhere to International Financial Reporting Standard 9. The FPC and the Prudential Regulation Committee (PRC) encourage firms to use any internationally agreed transitional arrangements as they adjust to the new regime, provided the arrangements are broadly similar to those currently being considered. The FPC and PRC will respect firms’ choices in future capital assessments and stress tests;
- following consultation, the FPC is confirming its recommendation to the Prudential Regulation Authority (PRA) to set the minimum leverage requirement at 3.25%, with central bank reserves removed from the leverage exposure measure. The PRA will shortly be publishing its rules on how this change will be implemented, alongside publication of the Record of the FPC’s meeting.
2.2 PRA SS6/17: Compliance with the EBA's guidelines on disclosure
On 27 September 2017, the Prudential Regulation Authority (PRA) published a supervisory statement (SS), SS6/17, on compliance with the European Banking Authority’s (EBA) guidelines on disclosure requirements under Part Eight of the Capital Requirements Regulation (CRR). SS6/17 sets out a waiver for the requirement to disclose template "EU CCR5-B - Composition of Collateral for exposures to CCR" (CCR5 B) and also sets out the PRA’s expectations in respect of certain aspects of firms’ compliance with the waiver.
The PRA had consulted on the supervisory statement in its June 2017 consultation paper, CP10/17. The PRA received no responses to itsproposals, and has therefore published the final SS6/17 with no changes to the proposed policy.
The purpose of SS6/17 is to help the PRA meet its primary objective of promoting the safety and soundness of firms. The ability of central banks to undertake liquidity assistance effectively, including the orderly disclosure of that assistance, is regarded as critical to financial stability. SS6/17 seeks to reduce the risk that firms’ compliance with the EBA guidelines could enable the use, or non-use, of liquidity assistance to be deduced.
SS6/17 is relevant to firms to which Part Eight of the CRR applies. Of these firms, it is directly relevant to firms within the scope of application of the full EBA guidelines which is limited to global systemically important institutions, other systemically important institutions, and to any other institution opted into the EBA’s guidelines on the basis of a supervisory decision.
2.3 Forecast capital data: PRA update
On 27 September 2017, the PRA updated its webpage on reporting requirements for CRD firms to give an update on its requirements relating to forecast capital data (known as Capital+).The requirements, which take effect on 1 October 2017, were previously set out in the PRA's November 2016 policy statement, PS32/16.
The PRA gives the following information:
- firms with a reporting deadline in December 2017: the PRA will aim to contact firms in the week commencing 25 October 2017 with details of what they need to know and do to use the live Bank of England Electronic Data Submission (BEEDS) portal to report their data;
- firms with a reporting deadline in January and February 2018: the PRA will contact firms in the week commencing 9 October 2017 to confirm User Acceptance Testing (UAT) dates and provide details of what firms need to know and do ahead of UAT and BEEDS onboarding;
- firms with a reporting deadline in March 2018 and beyond: the PRA will aim to provide an opportunity for UAT once a quarter in 2018. It will contact firms directly with any details on UAT and/or what they need to know and do ahead of their reporting deadline.
The PRA says that firms should refer to the indicative timeline for further details on key activities leading up to their submission date. Between 1 October 2017 and the first time a firm's return is due under the new rules, the PRA asks firms to continue to submit Capital+ returns under any current voluntary arrangements. In future, following this update, the PRA will contact firms directly with relevant updates on Capital+ reporting. If firms have any queries in the meantime, they should contact their usual supervisory contact.
2.4 IFRS 9: PRA Dear CEO letter on transitional arrangements for expected credit loss accounting
On 25 September 2017, the PRA published the text of a Dear CEO letter sent to firms by its Chief Executive Officer, Sam Woods, on transitional arrangements for the capital impact of International Financial Reporting Standard 9 (IFRS 9) expected credit loss (ECL) accounting.
The letter says that the Basel Committee on Banking Supervision and European legislative bodies have examined the case for transitional arrangements to be applied to the impact of IFRS 9 ECL accounting on credit institutions’ regulatory capital. It is likely that the Capital Requirements Regulation (CRR) will be amended to establish such arrangements in the EU. Based on the currently extant draft legislative texts for amending the CRR, the PRA says that it appears probable that the use of these arrangements will be at the option of the individual firm.
Against that background, the purpose of this letter is to:
- summarise the rationale for transitional arrangements;
- outline the main features of the transitional arrangements which have been considered within Europe thus far;
- set out the PRA’s views on UK firms using the arrangements: the PRA encourages UK firms to use them from the first day of IFRS 9 application (1 January 2018 for December year-end firms);
- note the tight timeframes within which UK firms will probably need to make a final decision: as the final amendment to the CRR may not become available until the end of 2017, the PRA advises firms to arrange for their boards to be in a position, if necessary, to make a final decision on the use of transitional arrangements in a compressed timescale across the year-end; and
- request a response by a date specified in individual letters on whether a firm intends to use the transitional arrangements. The PRA says that if a firm plans not to do so, it should include a full explanation of how the firm’s board has satisfied itself that the firm will have adequate financial resources, including in stressed scenarios. The firm's PRA supervisor would discuss such an explanation with it in the context of supervision of the firm’s resilience and capital adequacy.