CP8/24 – Restatement and minor amendments to CRR rules relating to the definition of own funds

Overview

Accompanying the second part of near final rules on the implementation in the UK of Basel 3.1, the Prudential Regulation Authority (PRA) published Consultation Paper 8/24 ‘Definition of Capital: restatement of CRR requirements in PRA Rulebook’ (CP8/24) covering various matters relating to own funds including revocation by HM Treasury (HMT) of related rules set out in inter alia Regulation (EU) No 575/2013 (the CRR) and transferring them, with certain modifications, into the PRA Rulebook. This follows an ongoing pattern in recent years, whereby, following Brexit, the PRA has sought to refine and consolidate prudential rules into its own rulebook.

The CP contains seven proposals as summarised below. For many small- and medium-sized banks there are some welcome if minor changes, in particular with respect to the simplification of certain process, e.g., to the pre-issuance notification process, or on recognition of interim profits.

Proposals

CP8/24 - High-level Summary of Proposals

1) Restate related CRR rules in the PRA Rulebook

Current CRR rules relevant to the definition of capital will be transferred into the PRA Rulebook, amending the pre-existing Own Funds and Eligible Liabilities (CRR) and Definition of Capital Parts. In particular:

• Articles 25 to 91 of CRR* are to be revoked by HMT and transferred, along with related provisions in Articles 2 to 12, 15(g-h), 16, 20 to 26, and 28-34a** of Regulation (EU) No 241/2014.

* Articles 31, 80, 465-466 and 485 have already been revoked; Article 36 was previously transferred to the PRA Rulebook; Articles 47a-c, 76(3), 78 and 83 are to be revoked and not transferred.

** For Article 33, also the related provisions in Regulation (EU) No 523/2014.

2) Changes to the Pre Issuance Notification (PIN) regime

The PRA is planning to simplify some of the requirements, which should ease the process of recognising new capital. Banks will no longer need to notify the PRA when issuing common equity tier 1 (CET1) capital on identical terms to existing CET1 capital that has already been approved by the PRA.

Furthermore, a bank can now notify the PRA as soon as practicable ex-post as opposed to ex-ante when issuing new CET1 or Additional Tier 1 (AT1) on terms that are substantially the same as those previously reviewed.

3) Inclusion of interim profits in CET1

Currently, banks must obtain independent validation (e.g., an external audit) of profits and obtain PRA permission prior to recognising these reserves as part of own funds. In a proposed minor simplification, banks would still be required to obtain verification of profits; however, there is no need to additionally seek the PRA’s permission - under the proposals, post-audit, a bank can recognise these profits and simply notify the PRA on their inclusion.

4) Early reduction of AT1 and Tier 2 capital instruments

If formalised, banks will under certain exceptional circumstances be permitted to redeem within the first 5-years of issuance their AT1 and Tier 2 instruments subject to PRA approval.

5 to 7) Minor amendments and clarifications of pre-existing CRR Rules

The PRA also proposed some minor amendments or clarifications, including:

• Clarify that the existence of non-CET1 shares would not preclude other instruments’ eligibility as CET1 capital.

• Require that all transactions that would result in a reduction of regulatory own funds need PRA permission.

• Clarify that the existence of provisions within the terms of a CET1 instrument that open the door to a potential future reduction would not preclude their eligibility as regulatory own funds, since any reduction would require prior permission from the PRA.