Pillar 2 as suddenly become centre stage. The European Central Bank (ECB), has been writing to banks on Pillar 2, however it is not 100% clear how they are approaching the topic. The UK Prudential Regulation Authority (PRA) has issued a consultation paper on changes to the Pillar 2 regime, which gives a clear view of their methodology. While it is not safe to assume the ECB will follow the same process we would be surprised if there is not considerable alignment between Frankfurt and London.
The main proposals are:
The consultation period for the UK runs to 17 April and the new framework will be implemented from 1 January 2016.
Although, as noted above, these proposed changes are UK – specific, they are consistent with the European Banking Authority’s guidelines (December 2014) on the Supervisory Review and Evaluation Process (SREP), and therefore also likely to be relevant to the ECB’s moves to introduce a harmonised SREP approach for the European Banking Union.
ECB supervised banks have already received quantitative supervisory capital requirements from the ECB, derived from the findings of the Comprehensive Assessment CA and of the (national) SREP process for 2014. By the end of 2015 the ECB will have in place a single SREP approach, judging the soundness of banks according to business model sustainability, robustness of governance and controls, risks for capital, and risks for liquidity and funding. This process will cumulate in a new SREP-letter, defining supervisory requirements – including Pillar 2 capital – for the next 12 months.
The main implications of the PRA revised approach (and indeed of the ECB’s likely approach) are that:
Setting out the details of the supervisory methodologies may constrain the discretion of a supervisor to reflect a bank’s own internal assessment of its capital requirements (as set out in the bank’s ICAAP submission) in the Pillar 2 capital requirement as determined by the bank’s supervisor.
For further KPMG analysis on this, please click here