PRA confirms UK approach to identifying non-bank 'systemically important' financial firms

Firms which hold less than 0.02% of the total assets of UK-authorised credit institutions and investment firms will be excluded from the classification process, following support for the PRA's original proposal from consultation respondents, the regulator said in a policy statement.

The EU's latest Capital Requirements Directive (CRD IV) requires national regulators to identify domestic systemically important banks and 'other systemically important institutions' (O-SIIs), including credit institutions and investment firms. Regulators must then take measures to reduce the probability and impact of the failure of firms identified as belonging to these categories; which may include higher loss absorbency requirements, more intensive supervision and resolution requirements.

Respondents to the PRA's consultation were concerned that the identification of particular firms as O-SIIs could lead to "markets treating those institutions differently", the regulator said in its consultation response. However, it pointed out that identification of O-SIIs was required by EU law.

As set out in its original consultation, the PRA intends to classify firms as O-SIIs using its existing 'potential impact' framework and European Banking Authority (EBA) guidelines as far as possible. In this way, it intends to minimise any additional regulatory burdens on firms. The EBA's guidelines score institutions for risk based on their total assets, importance, complexity and interconnectedness.

The PRA has clarified that it will use data provided through firms' annual financial reporting (FINREP) submissions to calculate their risk scores in line with the EBA guidelines following consultation feedback. It will use "proxies derived from other regulatory data" to estimate a score for those firms that are not required to submit FINREP forms, it said.

Designated UK O-SIIs will not generally be required to maintain additional capital buffers, as all banks and building societies which meet the thresholds for ring-fencing under domestic laws which are due to take effect in 2019 will instead be required to maintain a 'systemic risk buffer', according to the PRA's original consultation. These firms will already be subject to tighter regulatory requirements in line with the PRA's existing approach, it said.

Global systemically important banks and insurers are also subject to stricter regulatory requirements. Lists of relevant banks and insurers are maintained by the global Financial Stability Board (FSB).