PRA sets out new capital standards for banks

The Prudential Regulation Authority has set out rules clarifying how much capital banks will have to hold, ahead of the introduction of a new European capital regime next year.

In terms of the main equity capital banks and other major financial institutions will have to hold against their core ‘pillar 1’ risks, comprising of operational risk, credit risk and market risk, the so-called ‘common equity tier 1’ (CET1) requirement will be set at 4 per cent initially, rising to 4.5 per cent from 1 January 2015.

The regulator, which is part of the Bank of England following the split of the Financial Services Authority in April of this year, admitted that it currently has no comprehensive definition of what will fall under CET1, but that it is seeking to publish on “as soon as possible”.

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During the same period the required overall ‘tier 1’ capital ratio under this first risk pillar will be 5.5 per cent, rising to 6 per cent from 1 January 2015.

Firms will also have to meet all Pillar 2A risks, including pension risk, with at least 56 per cent of CET1 capital from 1 January 2015 onwards. This matches the proportion of CET1 capital required for Pillar 1, the PRA said.

In its consultation the PRA asked for views on whether Pillar 2A should be met in full with CET1 capital from 1 January 2016. Following consultation responses, the regulator decided that it will not require firms to meet Pillar 2A in full with CET1.

These changes follow a decision by the PRA to bring requirements into line with the capital and leverage requirements set out following the capital review earlier this year and published in June 2013.

At the time the PRA warned that some major UK banks were still some way from meeting capital ratio requirements, and that the bank capital shortfall was £2bn higher than previously thought.