Prudential Regulation Authority Rulebook

1.1

This Part applies to every firm that is a CRR firm.

1.2

In this Part the following definitions shall apply:

capital conservation buffer

means the amount of common equity tier 1 capital a firm must calculate in accordance with Chapter 2.

combined buffer

means the sum of

1. (a) the capital conservation buffer; and
2. (b) the countercyclical capital buffer.

countercyclical buffer rate

means (in accordance with point (7) of Article 128 of the CRD) the rate:

1. (a) expressed as a percentage of total risk exposure amount set by the FPC or an EEA countercyclical buffer authority; or
2. (b) expressed in terms equivalent to a percentage of total risk exposure amount set by a third country countercyclical buffer authority;

that a firm must apply in order to calculate its countercyclical capital buffer.

countercyclical capital buffer

means the amount of common equity tier 1 capital a firm must calculate in accordance with Chapter 3.

distribution in connection with common equity tier 1 capital

includes (in accordance with Article 141(10) of the CRD):

1. (a) a payment of cash dividends;
2. (b) a distribution of fully or partly paid bonus shares or other capital instruments referred to in Article 26(1)(a) of the CRR;
3. (c) a redemption or purchase by an institution of its own shares or other capital instruments referred to in Article 26(1)(a) of the CRR;
4. (d) a repayment of amounts paid up in connection with capital instruments referred to in Article 26(1)(a) of the CRR; and
5. (e) a distribution of items referred to in points (b) to (e) of article 26(1) of the CRR

EEA countercyclical buffer authority

means the authority or body of an EEA State other than the UK designated for the purpose of Article 136 of the CRD with responsibility for setting the countercyclical buffer rate for that EEA State or the European Central Bank when it carries out the task of setting a countercyclical buffer rate for an EEA State conferred on it by Article 5(2) of Council Regulation (EU) No. 1024/2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

FPC

means the Financial Policy Committee

MDA

means maximum distributable amount calculated in accordance with 4.3(4).

parent financial holding company in a Member State

means (in accordance with point (26) of Article 3(1) of the CRD) a financial holding company which is not itself a subsidiary of an institution authorised in the same EEA State, or of a financial holding company or mixed financial holding company set up in the same EEA State.

parent institution in a Member State

means (in accordance with point (24) of Article 3(1) of the CRD) an institution authorised in an EEA State which has an institution or financial institution as subsidiary or which holds a participation in such an institution or financial institution, and which is not itself a subsidiary of another institution authorised in the same EEA State or of a financial holding company or mixed financial holding company set up in the same EEA State.

parent mixed financial holding company in a Member State

means (in accordance with point (28) of Article 3(1) of the CRD) a mixed financial holding company which is not itself a subsidiary of an institution authorised in the same EEA State, or of a financial holding company or mixed financial holding company set up in the same EEA State.

relevant credit exposures

means (in accordance with Article 140(4) of the CRD) exposures other than those referred to in points (a) to (f) of Article 112 of the CRR that are subject to:

1. (a) the own funds requirements for credit risk under Part Three, Title II of the CRR; or
2. (b) where the exposure is held in the trading book, own funds requirements for specific risk under Part Three, Title IV, Chapter 2 of the CRR or incremental default and migration risk under Part Three, Title IV, Chapter 5 of the CRR; or
3. (c) where the exposure is a securitisation, the own funds requirements under Part Three, Title II, Chapter 5 of the CRR.

third country countercyclical buffer authority

means the authority of a third country empowered by law or regulation with responsibility for setting the countercyclical buffer rate for that third country.

total risk exposure amount

means the total risk exposure amount of a firm calculated in accordance with Article 92(3) of the CRR.

1.3

Unless otherwise defined, any italicised expression used in this Part and in the CRR has the same meaning as in the CRR.

2.1

A firm must calculate a capital conservation buffer of common equity tier 1 capital equal to 2.5% of its total risk exposure amount.

[Note: Art 129(1) (part) of the CRD]

2.2

This rule modifies 2.1 for a transitional period between 1 January 2016 and 31 December 2018:

1. (1) from 1 January 2016 until 31 December 2016 for 2.5% there is substituted 0.625%;
2. (2) from 1 January 2017 until 31 December 2017 for 2.5% there is substituted 1.25%; and
3. (3) from 1 January 2018 until 31 December 2018 for 2.5% there is substituted 1.875%.

[Note: Art 160(1) to (5) (part) of the CRD]

3.1

1. (1) A firm must calculate a countercyclical capital buffer of common equity tier 1 capital equal to its total risk exposure amount multiplied by its institution-specific countercyclical capital buffer rate.

[Note: Art 130(1) (part) of the CRD]

1. (1A) A firm’s institution-specific countercyclical capital buffer rate consists of the weighted average of the countercyclical buffer rates that apply to exposures in the jurisdictions where the firm’s relevant credit exposures are located, calculated in accordance with (2).
2. (2) In order to calculate the weighted average referred to in (1A), a firm must apply to each applicable countercyclical buffer rate its total own funds requirements for credit risk, specific risk, incremental default and migration risk that relates to the relevant credit exposures in the jurisdiction in question, divided by its total own funds requirements for credit risk, specific risk, incremental default and migration risk that relates to all of its relevant credit exposures.
3. (3) For the purposes of (2), a firm must calculate its total own funds requirement for credit risk, specific risk, incremental default and migration risk in accordance with Part Three, Titles II and IV of the CRR.
4. (4) The countercyclical buffer rate for an exposure located in the UK is the rate set by the FPC for the UK.
5. (5) The countercyclical buffer rate for an exposure located in an EEA State other than the UK is:
1. (a) the rate set by the EEA countercyclical buffer authority for that jurisdiction; or
2. (b) if that rate exceeds 2.5% and has not been recognised by the FPC, 2.5%.
6. (6) The countercyclical buffer rate for an exposure located in a third country is the rate set by the FPC for that jurisdiction.
7. (7) If the FPC has not set a rate for a third country, the countercyclical buffer rate for an exposure located in that jurisdiction is:
1. (a) the rate set by the third country countercyclical buffer authority for that jurisdiction; or
2. (b) if that rate exceeds 2.5% and has not been recognised by the FPC, 2.5%.
8. (8) If the FPC has not set a rate for a third country and either there is no third country countercyclical buffer authority for that country or the authority has not set a rate for that jurisdiction, the countercyclical buffer rate for an exposure located in that jurisdiction is zero.
9. (9) If the rate for the UK is increased, that increase takes effect from the date specified by the FPC.
10. (10) If the rate for an EEA State other than the UK is increased, subject to (5)(b) that increase takes effect from:
1. (a) the date specified by the EEA countercyclical buffer authority for that jurisdiction, if the rate applied under this Chapter does not exceed 2.5%;
2. (b) the date specified by the FPC if the rate applied under this Chapter exceeds 2.5%.
11. (11) If the rate for a third country is increased by the FPC, that increase takes effect from the date specified by the FPC.
12. (12) If the FPC does not set a rate for a third country and the rate for that third country is increased by the third country countercyclical buffer authority for that jurisdiction, subject to (7)(b) that increase takes effect from:
1. (a) the date 12 months after the date on which the increase was published by the third country countercyclical buffer authority in accordance with the relevant law the third country, if the rate applied under this Chapter does not exceed 2.5%;
2. (b) the date specified by the FPC if the rate applied under this Chapter exceeds 2.5%.
13. (13) If a rate is reduced, that reduction takes effect immediately.

[Note: Art 140 of the CRD.]

3.2

This rule applies until 31 December 2015

1. (1) A firm must calculate a countercyclical capital buffer of common equity tier 1 capital equal to its total risk exposure amount multiplied by the weighted average of the countercyclical buffer rates that apply in the jurisdictions where the firm’s relevant credit exposures are located.
2. (2) In order to calculate the weighted average referred to in (1), a firm must apply to each applicable countercyclical buffer rate its total own funds requirements for credit risk, specific risk, incremental default and migration risk that relates to the relevant credit exposures in the jurisdiction in question, divided by its total own funds requirements for credit risk that relates to all of its relevant credit exposures.
3. (3) For the purposes of (2), firm must calculate its total own funds requirement for credit risk, specific risk, incremental default and migration risk in accordance with Part Three, Titles II and IV of the CRR.
4. (4) The countercyclical buffer rate for an exposure is the rate recognised or set by the FPC for the jurisdiction in which that exposure is located.
5. (5) If the FPC does not recognise or set a rate for the jurisdiction in which an exposure is located, the countercyclical buffer rate for that exposure is zero.
6. (6) If the rate recognised or set by the FPC for a jurisdiction is increased, that increase takes effect from the date specified by the FPC.
7. (7) If a rate is reduced, that reduction takes effect immediately.

[Note: Art 160(6) (part) of the CRD]

4.1

A firm does not meet the combined buffer if the common equity tier 1 capital maintained by the firm which is not used to meet the own funds requirement under Article 92(1)(c) of the CRR does not meet the combined buffer.

[Note: Art 129(5) (part) and 130(5) (part) of the CRD]

4.2

A firm that meets the combined buffer must not make a distribution in connection with common equity tier 1 capital to an extent that would decrease its common equity tier 1 capital to a level where the combined buffer is no longer met.

[Note: Art 141(1) of the CRD]

4.3

1. (1) A firm that does not meet the combined buffer must:
1. (a) calculate the MDA in accordance with (4); and
2. (b) report the MDA to the PRA in writing no later than 5 working days after the firm identified that it did not meet the combined buffer.
2. (2) A firm that does not meet the combined buffer must not undertake any of the following actions before it has calculated the MDA:
1. (a) make a distribution in connection with common equity tier 1 capital;
2. (b) create an obligation to pay variable remuneration or discretionary pension benefits or pay variable remuneration or discretionary pension benefits if the obligation to pay was created at a time when the firm did not meet the combined buffer; and
3. (c) make payments on additional tier 1 instruments.
3. (3) If a firm does not meet the combined buffer, it must not distribute more than the MDA calculated in accordance with (4) through any action referred to in points (a) to (c) of (2).
4. (4) A firm must calculate the MDA by multiplying the sum calculated in accordance with (5) by the factor determined in accordance with (6). The MDA shall be reduced by any of the actions referred to in point (a), (b) or (c) of (2)..
5. (5) The sum to be multiplied in accordance with (4) shall consist of:
1. (a) interim profits not included in common equity tier 1 capital pursuant to Article 26(2) of the CRR that have been generated since the most recent decision on the distribution of profits or any of the actions referred to in points (a), (b) or (c) of (2);
2. plus
3. (b) year-end profits not included in common equity tier 1 capital pursuant to Article 26(2) of the CRR that have been generated since the most recent decision on the distribution of profits or any of the actions referred to in points (a), (b) or (c) of (2);
4. minus
5. (c) amounts which would be payable by tax if the items specified in points (a) and (b) were to be retained.
6. (6) The factor referred to in (4) shall be determined as follows:
1. (a) if the common equity tier 1 capital maintained by the firm which is not used to meet the own funds requirement under Article 92(1)(c) of the CRR expressed as a percentage of the firm’s total risk exposure amount, is within the first (that is, the lowest) quartile of the combined buffer, the factor shall be 0;
2. (b) if the common equity tier 1 capital maintained by the firm which is not used to meet the own funds requirement under Article 92(1)(c) of the CRR, expressed as a percentage of the firm’s total risk exposure amount, is within the second quartile of the combined buffer, the factor shall be 0.2;
3. (c) if the common equity tier 1 capital maintained by the firm which is not used to meet the own funds requirement under Article 92(1)(c) of the CRR expressed as a percentage of the firm’s total risk exposure amount is within the third quartile of the combined buffer, the factor shall be 0.4; and
4. (d) if the common equity tier 1 capital maintained by the firm which is not used to meet the own funds requirement under Article 92(1)(c) of the CRR expressed as a percentage of the firm’s total risk exposure amount, is within the fourth (that is, the highest) quartile of the combined buffer, the factor shall be 0.6.
7. (7) A firm must calculate the lower and upper bounds of each quartile of the combined buffer as follows:
1. Lower bound of quartile
   
   
2. Combined buffer
   = –––––––––––––– x (Q_n - 1)
   4
1. Upper bound of quartile
   
   
2. Combined buffer
   = –––––––––––––– x Q_n
   4
1. "Qn" indicates the ordinal number of the quartile concerned.
14. (8) The restrictions imposed by this rule only apply to payments that result in a reduction of common equity tier 1 capital or in a reduction of profits, and where a suspension of payment or failure to pay does not constitute an event of default or a condition for the commencement of proceedings for an order for the appointment of a liquidator or administrator of the firm.
15. (9) If a firm does not meet the combined buffer and intends to distribute any of its distributable profits or undertake an action referred to in points (a), (b) and (c) of (2) it must give the PRA notice of its intention at least one month before the intended date of distribution or action unless there are exceptional circumstances which make it impracticable to give such a period of notice in which event the firm must give as much notice as is practicable in those circumstances. When giving notice a firm must provide the following information:
1. (a) the amount of own funds maintained by the firm, subdivided as follows:
1. (i) common equity tier 1 capital;
2. (ii) additional tier 1 capital; and
3. (iii) tier 2 capital.
2. (b) the amount of its interim and year-end profits;
3. (c) the MDA calculated in accordance with (4);
4. (d) the amount of distributable profits it intends to allocate between the following:
1. (i) dividend payments;
2. (ii) share buybacks;
3. (iii) payments on additional tier 1 instruments; and
4. (iv) the payment of variable remuneration or discretionary pension benefits, whether by creation of a new obligation to pay, or payment pursuant to an obligation to pay created at a time when the firm did not meet its combined buffer.
16. (10) A firm must maintain arrangements to ensure that the amount of distributable profits and the MDA are calculated accurately and must be able to demonstrate that accuracy to the PRA on request.

[Note: Art 141(2) to 141(10) of the CRD]

4.4

When a firm does not meet the combined buffer, it must prepare a capital conservation plan and submit it to the PRA no later than 5 working days after the firm identified that it did not meet the combined buffer.

[Note: Art 142(1) of the CRD]

4.5

The capital conservation plan must include the following:

1. (1) the MDA;
2. (2) estimates of income and expenditure and a forecast balance sheet;
3. (3) measures to increase the capital ratios of the firm; and
4. (4) a plan and timeframe for the increase of own funds with the objective of meeting the combined buffer.

[Note: Art 142(2) of the CRD]

5.1

This Part applies to a firm on an individual basis whether or not it also applies to the firm on a consolidated basis or sub-consolidated basis.

5.1A

If this Part applies to a firm on an individual basis, the firm must comply with the rules in this Part to the same extent and in the same manner as it is required to comply with the firm’s obligations laid down in Parts Two to Four and Part Seven of the CRR.

5.2

A firm which is a parent institution in a Member State must comply with this Part on the basis of its consolidated situation.

5.3

A UK bank or building society controlled by a parent financial holding company in a Member State or a parent mixed financial holding company in a Member State must comply with this Part on the basis of the consolidated situation of that holding company, if the PRA is responsible for supervision of the UK bank or building society on a consolidated basis under Article 111 of the CRD.

5.4

A UK designated investment firm controlled by a parent financial holding company in a Member State or a parent mixed financial holding company in a Member State must comply with this Part on the basis of the consolidated situation of that holding company, if:

1. (1) there is no subsidiary of the holding company which is a credit institution to which 5.3 applies; and
2. (2) the PRA is responsible for the supervision of the UK designated investment firm on a consolidated basis under Article 111 of the CRD.

5.5

A firm that is a subsidiary must apply this Part on a sub-consolidated basis if the firm, or the parent undertaking where it is a financial holding company or mixed financial holding company, have an institution or financial institution as a subsidiary in a third country or hold a participation in such an institution or financial institution.

5.6

If this Part applies to a firm on a consolidated basis or on a sub-consolidated basis, the firm must carry out consolidation to the same extent and in the same manner as it is required to comply with the obligations laid down in Parts Two to Four and Part Seven of the CRR on a consolidated basis or sub-consolidated basis.

[Note: Art 129(1) (part) and 130(1) (part) of the CRD]