On February 19, 2016, the Prudential Regulation Authority published policy statement outlining approach to identifying other systematically important institutions (i.e. institutions that are not classed as globally systematically important financial institutions but whose failure would have a significant negative effect on the UK financial system). The PRA is required to identify O-SIIs pursuant to the Capital Requirements Directive which implements the framework for domestic systemically important institutions developed by the Basel Committee for Banking Standards. In developing approach the PRA has taken into consideration the European Banking Authority’s guidelines which set out a two stage process to identifying O-SIIs. The first stage outlines a minimum mandatory framework and the second stage provides discretion to national regulatory authorities, such as the PRA, to overlay the framework to reflect the national banking sector. The framework is to be applied to all banks, investment firms, European Economic Area parent institutions, EEA parent financial holding companies and EEA parent mixed financial holding companies established within the United Kingdom. The framework is not to be applied to branches of EEA and third-country overseas firms, investment firms which are not regulated by the PRA and firms whose total assets constitute less than 0.02% of the total assets of UK banks and investment firms. The mandatory categories to be taken into account under the EBA Guidelines to identify O-SIIs, include: size, importance, complexity and interconnectedness. The application of indicators in each category provides a numerical value used to determine whether the entity is an O-SII. The PRA has chosen to exercise its discretion, as per the second stage of the EBA Guidelines, and has used its potential impact framework to align the definition of O-SIIs broadly with that of Category 1 firms. Category 1 firms are those whose failure would have the greatest impact on the UK financial system and economy. As a result, an entity may fail to qualify as an O-SII based on its score from the mandatory framework calculation, however, the PRA may designate O-SII status if it falls within Category 1. The O-SII identification will be conducted by the PRA annually and the list of firms labelled O-SIIs will be published by December 1 of each year. The PRA will also publish the score of each firm derived using the EBA guidelines and the rationale as to why a firm has been designated as an OSII despite failing to reach the minimum score under the EBA guidelines.
The PRA’s Policy Statement is available at: http://www.bankofengland.co.uk/pra/Documents/publications/sop/2016/approachtoosiis.pdf.
The EBA’s Guidelines are available at: https://www.eba.europa.eu/documents/10180/930752/EBA-GL-2014- 10+%28Guidelines+on+O-SIIs+Assessment%29.pdf.