In this week's newsletter, we provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructure providers, asset managers and corporates.
Bank Prudential Regulation & Regulatory Capital
UK Prudential Regulator Proposes Period of Overlap for Transition to New Pillar 2 Reporting Template
On October 12, 2018, the U.K. Prudential Regulation Authority published a consultation proposing a six-month overlap period following the introduction of the new Pillar 2 Liquidity reporting template (PRA110) from July 1, 2019. The Capital Requirements Directive gives national regulators discretion to set additional Pillar 2 liquidity requirements, to capture those liquidity risks that are either not captured or not fully captured under the Pillar 1 framework. The final element—Pillar 3—involves public reporting of capital. The PRA published its final Policy Statement on the introduction of its Pillar 2 framework in February 2018. The PRA110 template was scheduled to replace the existing "daily flows" and "enhanced mismatch" liquidity reports (FSA047 and FSA048) from July 1, 2019. Since its Policy Statement, the PRA has reassessed the risks from transitioning to the PRA110 template and considers it prudent to delay the termination of FSA047 and FSA048, to ensure data quality and continuity. The PRA proposes that the PRA110 is introduced on July 1, 2019 as planned. However, between then and January 1, 2020, firms should additionally continue to submit liquidity reports using FSA047 and FSA048. The overlap will allow the PRA and firms alike to assess the quality of PRA110 reporting. The PRA is inviting comments on the proposal by November 12, 2018. The PRA considers that the short consultation period is justified due to the fact that firms are already reporting using FSA047 and FSA048.
The consultation paper (PRA CP22/18) is available at: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2018/cp2218.pdf and details of the PRA's Pillar 2 Policy Statement are available at: https://finreg.shearman.com/uk-prudential-regulation-authority-publishes-fin.
UK Financial Policy Committee Publishes Outcome of Its October Meeting
On October 9, 2018, the Financial Policy Committee published a statement from its meeting held on October 3, 2018 where it reviewed developments since June 19, 2018. The FPC continues to consider that the U.K. banking system is sufficiently robust to withstand the disruption of a "hard Brexit" and that there is no need for additional capital buffers for banks as a result. The FPC is of the view that the banking system would be able to absorb, in addition to a disorderly Brexit, further costs that might arise from trade tensions. However, the FPC is concerned about the lack of action taken by EU authorities to address the risks of disruption in the event of the U.K. leaving the EU without a deal on March 29, 2019. In particular, the FPC would like mitigating action to be taken to address the risks associated with derivatives contracts and the transfer of personal data. Aside from the risks presented by Brexit, the FPC considers that domestic risks are still at a standard level overall. However, the FPC is concerned about the swift growth of leveraged lending and intends to: (i) assess the implications for banks in the 2018 stress test; and (ii) review the impact of the increasing role of non-bank lenders and changes in the distribution of corporate debt. The FPC has decided to maintain the U.K. countercyclical capital buffer rate at 1% and will review the rate again at its meeting on November 28, 2018. The FPC also announced that the launch of the next biennial exploratory scenario will be delayed to September 2019 as firms and the Bank of England continue to devote resources to prepare for Brexit.
The FPC's statement is available at: https://www.bankofengland.co.uk/statement/fpc/2018/financial-policy-committee-statement-october-2018.
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