Prudential Regulation Authority Rulebook

4.1

The factors that the PRA considers in assessing its ability to effectively supervise a particular international bank include whether:

1. (a) the PRA receives sufficient co-operation, and financial and regulatory information on the overseas risks and financial position connected with the firm, from its group or head office and relevant overseas supervisory authorities (see Box 1);
2. (b) any wider group to which the firm belongs has the capacity and willingness to support the firm;
3. (c) where the firm’s governance is provided by individuals with roles in a wider group, that governance is effective in taking into account the risks to the firm and, conversely, where the firm’s governance is provided by individuals whose only role is within the firm, those individuals have appropriate influence within the wider group’s management;
4. (d) booking arrangements are transparent and effective, and the firm appropriately manages the risks that it originates, receives, and transfers out to affiliates (see Box 2);
5. (e) operational resilience arrangements that are in place with other group members are sufficient, in the case of a UK subsidiary, to allow compliance with PRA operational resilience requirements; or, in the case of a UK branch, to assure the PRA that the services the branch offers in the UK are operationally resilient. For branches, the PRA will consider whether the home state’s operational resilience regime is sufficiently robust to deliver outcomes similar to those required by the UK regime, including whether the home state supervisor has adopted the Basel Principles on Operational Resilience and whether the firm can demonstrate that it is in compliance with its home state regime.^[26] The PRA will also look to gain assurance that operational disruption at group level does not represent undue risk to the group as a whole, and thereby provision of services by the UK business; and
6. (f) a credible group resolution strategy, or plans to support or wind up the firm in line with the Bank’s resolution objectives, are in place.

4.2

The PRA expects to have access to certain categories of financial and regulatory information for every international bank in order to be able to assess whether it would meet threshold conditions on authorisation and continue to meet them on an ongoing basis, and to assess the impact that the firm’s activities may have on the stability of the UK financial system. The level of detail will vary according to the size and complexity of the firm’s business. The PRA also expects to receive a broader range of information in situations where the international bank poses a higher risk to financial stability, or where its business is more highly integrated with overseas operations and hence more at risk from activities outside of the PRA’s direct supervision.

4.3

The PRA also follows, and expects other supervisory authorities to follow, the guidance provided by relevant international committees (the Basel Committee on Banking Supervision in particular) concerning supervisory co-operation. In practice, the PRA finds certain aspects particularly conducive to constructive relationships and effective supervision. These matters of what might be regarded as ‘good practice’ are included in Box 1 below under ‘Examples of information that the PRA sees when a strong and co-operative relationship exists with home state supervisors and firms’. These are illustrative rather than a substitute for internationally agreed standards of co-operation.

4.4

Appropriate visibility of group risks is achieved by a combination of an effective co-operative relationship with the home state supervisor and appropriate information sharing by the home state supervisor and the firm. This is particularly relevant at the point of authorisation or where a firm’s circumstances change materially. Where the firm’s scale and operating model require the PRA to have certain information on group risks, the PRA will first discuss the information that it requires with the home state supervisor (with a view to the home state supervisory authority providing this information where possible). The PRA will then discuss appropriate arrangements with the firm concerning any additional information it requires. The PRA, in consultation with the Bank in its capacity as resolution authority, may also require additional information from the home resolution authority and firm regarding the resolution arrangements of firms of such size and complexity that they may pose a higher risk to UK financial stability.

4.5

For each firm that is part of an international group, commensurate with its systemic importance and the degree of cross-border integration of its UK business, the PRA:

• aims to contribute to the supervisory strategy for the group as a whole, and to have insight into the group supervisory strategy, as necessary to achieve the PRA’s objectives;
• expects to agree with the home state supervisor how best to co-ordinate supervisory work where common areas of interest are identified, and to undertake supervisory work in conjunction with the home state supervisor. This could include joint visits to the UK subsidiary or branch in appropriate cases where both the PRA and the home state supervisor have prioritised work in particular areas. It could also include the PRA having direct access to management in the international group or parent where that is relevant to the PRA’s understanding of strategy and risks that may affect the UK operations;
• expects to have a regular and proactive exchange of supervisory assessments with the home state supervisor, such as the results of firm visits or analyses in areas that are of particular relevance to the UK entity;
• expects a prompt exchange of information and proactive notification of issues materially relevant to the UK entity;
• expects to have access to information on governance and financial resilience for the firm as a whole, and the group of which it is part, where it is relevant for the PRA’s supervision of the international bank and the PRA’s objectives; and
• needs to be satisfied, in consultation with the Bank as UK resolution authority, that the resolution authority or authorities in the relevant home jurisdictions for the group have adequate powers and plans for the group’s resolution.

4.6

Box 1 sets out the additional information on group risks, beyond what it receives in respect of the UK business, that the PRA expects to see. In broad terms, the PRA is open to discussion with the home state supervisor and the firm as to how this information is provided. For example, it could be provided through engagement at supervisory colleges, in a structured way as provided to or agreed by relevant supervisory authorities, or in the form of management information prepared by the firm for internal purposes. The PRA also has no specific expectation as to whether information prepared by entities in the group is provided by those entities, the UK entity, or any supervisor, or whether information prepared by supervisors is received directly from supervisors or provided by group entities. Firms and their home state supervisors may decide the process for the provision of information to the PRA based on their individual circumstances. In the case of the smallest firms, the PRA will seek to obtain most of this information from the home state supervisor during its routine supervisory engagement with the PRA and in keeping with arrangements described in an MoU (where this exists between authorities).

4.7

In taking this approach, the PRA aims to minimise the time and effort required to produce the information it needs from supervisory authorities, international banks, or their group entities. The PRA acknowledges that some information, such as supervisory assessments and peer group analyses, can only be provided by supervisory authorities. The PRA expects the information to be refreshed periodically to ensure that it remains relevant over practical timescales and the practical arrangements can be agreed between the home state supervisor, the firm, and the PRA.

4.8

The precise information and data that the PRA will expect to receive may change over time, especially as events and risks crystallise. The PRA will keep its expectations under review and will aim to be proportionate in its requests.

Box 1: The PRA’s expectations for information sharing

4.9

As regards the group’s capacity and willingness to support a subsidiary, the PRA expects UK subsidiaries to be financially resilient on a standalone basis. But beyond this, there are situations where the ability of the group to support other group entities, including the UK operations, needs to be taken into account. These are, for example, where assessments need to be made of the diversification of risks within the group and of the extent to which funding through debt at the parent level is used to support equity at a subsidiary level, increasing reliance on distributions from equity to service such debt. It is also a consideration when assessing intragroup large exposures and whether parental support to entities in the wider group mitigates the risk that amounts owed to UK subsidiaries will not be repaid. The PRA also has expectations concerning information on the firm’s operational resilience where this depends on group systems (see paragraph 4.26).

4.10

There may be some situations where explicit guarantees of international banks are expected from another group entity, for example with respect to an international bank’s ability to access central bank funding.

4.11

The PRA will establish a view, at least at a minimum in qualitative terms, on the capacity and willingness of the group to support subsidiaries in stressed scenarios, and any barriers to that support arising from the regulatory regimes that apply to it.

4.12

The Bank already takes a similar approach when setting internal minimum requirements for own funds and eligible liabilities (MREL) for hosted subsidiaries. As set out in the Bank’s SoP ‘The Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities, in deciding whether to set internal MREL for a material sub-group or subsidiary above 75% scaling, the Bank will take into account the resolution strategy applicable to the group and the credibility of the resolution plan for delivering it, and the availability of other uncommitted resources within the group that could be readily deployed to support the material subsidiary, among other factors.^[29]

4.13

The PRA recognises the fiduciary duties of directors of subsidiaries. Subsidiary boards must also be capable of acting in the best interests of the firm for which they are responsible, as well as safeguarding its safety and soundness.^[30]

4.14

The principles of good governance should apply to all PRA-regulated subsidiaries, including the principle that boards should have sufficient independence, to help ensure they can provide effective challenge to the business. Where a smaller and less complex subsidiary proposes not to have an independent non-executive chair, the firm should still be able to explain how its governance arrangements will otherwise satisfy the need for independent oversight of the executives. Moreover, all firms have an obligation to ensure that all their directors, in particular non-executives, act with sufficient independence of mind and ‘make their own sound, objective and independent decisions and judgments when performing their functions and responsibilities’.^[31] The non-executive directors on the board should hold management to account against the matters delegated, and be able to challenge the executive effectively and promptly. Firms should have regard to the expectations on board responsibilities outlined in SS5/16 ‘Corporate governance: Board responsibilities’.^[32]

4.15

The UK subsidiary or branch should establish, implement, and maintain adequate risk management policies and procedures, including effective procedures for risk assessment, which identify the risks relating to its activities, processes, and systems, and where appropriate, set its risk appetite or the level of risk tolerated.^[33] As noted in the PRA’s approach to banking supervision, senior management should embed the principle of safety and soundness in the culture of their organisation.^[34]

4.16

Where group risk management decisions are being taken which could have an effect on the UK subsidiary or branch, those decisions should take into account the views of representatives from the subsidiary or branch. Those representatives should be given sufficient access to, and influence in, the relevant decision-making committee(s). Firms should take into account their size and internal organisation and the nature, scale, and complexity of their activities when developing and implementing policies and procedures.^[35]

4.17

To meet the PRA’s expectations on information sharing, it is desirable to ensure appropriate connectivity between the firm and its head office or with the parent company board. For example, in the case of a UK subsidiary, a non-executive director from the group board may sit on the local board (or vice versa), or the local chairs of the Risk and Audit Committees may meet regularly with their counterparts at the parent.

4.18

Where the group has a large-scale operation comprising both a branch and subsidiary in the UK, and together they are systemically important, then even though the PRA generally expects branches and subsidiaries to have independent governance arrangements (to safeguard against conflicts of interest in how risks are booked into the UK), the need for there to be a holistic view of UK risks may be more important. In those circumstances, it may be appropriate to have either a UK or regional Chief Executive Officer (CEO) overseeing the whole UK footprint, and potentially other arrangements to ensure it has a comprehensive view of the risks the firm runs in the UK.^[36]

4.19

A subsidiary should ensure that they have an appropriate number of SMFs according to its size, complexity, and governance structure, in line with the principles outlined in SS28/15 ‘Strengthening individual accountability in banking’.^[37] Firms should particularly ensure that Management Responsibilities Maps and Statements of Responsibilities (SoR) are up to date and that responsibilities are allocated in accordance with the Allocation of Responsibilities Part of the PRA Rulebook and SS28/15.^[38]

4.20

Where applicable, the PRA expects firms to allocate the responsibility for overseeing the firm’s booking arrangements to an SMF, and record this appropriately in their Statement of Responsibilities. Where individuals in the parent or in group entities exercise significant influence over the management or conduct of one or more aspects of the firm’s UK regulated activities, it may be appropriate for them to be approved as a Group Entity Senior Manager (SMF7). However, firms have applied for individuals performing a range of functions to be approved as SMF7. Examples include:

• group executives on the board of a UK subsidiary (including smaller firms where parent executives may sit on a UK subsidiary board as non-executives);
• global business line heads operating as senior executives at a UK branch or subsidiary; and
• individuals who combine a global or group role with key responsibilities in the UK (and with significant influence over the UK branch or subsidiary), such as global heads of technology, heads of internal audit, and global heads of operations.

4.21

However, while these examples may be helpful, ultimately whether an individual requires approval as a SMF7 is assessed by the PRA on a case-by-case basis.

4.22

In the case of a firm that has a UK systemic wholesale branch which is part of a group based overseas, and an individual in a related group entity has significant influence over the branch’s booking arrangements, that individual should seek approval as SMF7 (see Box 3).

4.23

Where applicable, the PRA expects firms to allocate the responsibility for overseeing the firm’s booking arrangements to an SMF, and to record this appropriately in their SoR.

4.24

The PRA is open to firms operating a diverse range of booking arrangements, including globally integrated structures, provided that they meet the PRA’s expectations as set out in Box 2.

4.25

By booking arrangements, the PRA means the front-to-back lifecycle of trading, from origination, trade execution, risk capture and transfer, through to back-office settlement. The PRA seeks to ensure that firms have appropriate controls for the full lifecycle of their trades. At the start of the lifecycle, a firm should include within its control framework those traders managing the risk directly and those facilitating the execution and delivery of risk to the firm’s balance sheet, such as sales people or sales traders. In terms of activity, the PRA’s expectations in Box 2 relate primarily to the trading book. However, the PRA recognises that some of items housed in the banking book will pose similar risks given their nature, and firms should consider whether and how their booking frameworks and controls should be extended to cover them.

Box 2: The PRA's expectations for booking arrangements

4.26

The PRA expects international banks to understand the services they provide to external end users in the UK, and the risk posed to the firm’s safety and soundness in the event of a severe but plausible disruption to such services.^[41] The PRA expects that firms should be prepared to identify these services to the PRA, and articulate the point at which disruption to these services poses a risk to the firm’s safety and soundness or the financial stability of the UK (if appropriate).

4.27

The PRA considers international banks should have a sufficient understanding of the necessary operational resources that are used to deliver such services, regardless of geographic location, in order to adequately understand the risk posed to the firm’s safety and soundness or the financial stability of the UK in the event of severe but plausible operational disruptions.

4.28

In addition, the PRA will consider the robustness of the home state’s operational resilience regime, to gain assurance that operational disruption at the group level does not represent undue risk to the group as a whole, and thereby provision of services by the UK business. This will be particularly relevant where functions are outsourced by the international bank to other parts of its group, and for branches, as they are not subject to the PRA’s rules on operational resilience.

4.29

The PRA works with the Bank as UK resolution authority to ensure that where a firm fails, it does so in a way that avoids significant disruption to the supply of critical functions to its customers and other counterparties. It is the Bank’s responsibility to set the resolution strategy, set MREL, and ultimately execute any resolution, but the PRA acts in co-operation with the Bank to ensure that firms have appropriate resolution arrangements in place as part of going concern supervision, consistent with Fundamental Rule 8. Consequently, resolvability is an important consideration in the PRA’s supervisory approach to international banks. The effectiveness of the home state regime and the credibility of a group’s resolution strategy, and the resolvability outcomes set out in the Bank’s RAF, where relevant, are an integral part of the assessment.

4.30

The PRA will consider in particular:

• the alignment of the firm’s group resolution strategy set by the home resolution authority with the PRA’s objectives, including whether it ensures the continuity of the firm’s critical functions in the UK;
• the credibility and feasibility of the firm’s group resolution strategy, including a clear process to identify and remove barriers to resolution by the home state supervisor or home resolution authority involving the host authorities, including the PRA; and
• the adequacy of the firm’s resolution arrangements, consistent with Fundamental Rule 8 and the RAF:
  • for the relevant subsidiaries, the PRA will take into account the Bank’s assessments as to whether the capabilities of the group would deliver resolvability outcomes that are broadly comparable to those set out in the Bank’s SoP ‘The Bank of England’s Approach to Assessing Resolvability’;^[42] and
  • for branches, although the RAF does not apply to these entities, the resolvability outcomes set out in the Bank’s SoP provide relevant context for the Bank’s engagement with the PRA in respect of the authorisation and supervision of the UK branches of overseas banking groups.^[43]