We set out our proposed approach to the interaction between our capital planning buffer (CPB) and the capital buffers required under the CRD IV during the transition period from 1 January 2016 to 1 January 2019.
The Financial Policy Committee (FPC) has set a countercyclical buffer (CCyB) rate for the UK which will rise from 0% to 0.5% of risk-weighted assets from 29 March 2017. This means an investment firm regulated by us and subject to the CRD IV must calculate a combined buffer from January 2016.
The firms affected will generally be investment firms with Part 4A permission to carry on the regulated activity of dealing in investments as principal – ie IFPRU 730K firms[1] – but not small and medium-sized firms under IFPRU 10.7[2].
The combined buffer is made up of several components but only two are relevant to investment firms regulated by us – the capital conservation buffer (CCoB) and the countercyclical buffer (CCyB). No investment firms regulated by us are subject to the Global Systemically Important Institutions (G-SII) buffer or the Systemic Risk Buffer (SRB).
Where we have previously told a firm that it should hold a CPB, we consider that the amount of the CPB can be offset by the amount of the combined buffer calculated by the firm – ie the firm should hold the higher of CPB or the combined buffer. This is to avoid double counting of risks where the CPB has been set based on the impact of a severe but plausible stress scenario.
Illustrative example
The below example shows a simple IFPRU 730K firm with a static balance sheet. We have assumed that all relevant credit exposures are located exclusively in the UK. It also assumes that the CCyB does not change during the period.
| 730k investment firm | 2015 | 2016 | 2017 | 2018 | 2019 |
|---|---|---|---|---|---|
| CCoB (%RWA) | 0 | 0.625 | 1.25 | 1.875 | 2.5 |
| CCoB (£m) | 0 | £20m | £40m | £60m | £80m |
| CCyB (%RWA) | 0 | 0 | 0.5 | 0.5 | 0.5 |
| CCyB (£m) | 0 | 0 | £16m | £16m | £16m |
| Combined buffer (£m) | 0 | £20m | £56m | £76m | £96m |
| CPB (£80m; with off-set combined buffer) | £80m | £60m | £24m | £4m | £0m |
| Total buffers (CPB + combined buffer) | £80m | £80m | £80m | £80m | £96m |
| Available CET1 to meet buffers (above P1 + P2A) | £85m | £85m | £85m | £85m | £85m |
| Impact on MDA |
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| distribution restrictions apply |
This firm has Common Equity Tier 1 (CET1) capital available to meet the buffers of £85m after meeting its Pillar 1 and Pillar 2A requirements. The firm meets all of its buffers in the period from 2015 to end 2018 but with only a small margin of £5m.
Consistent with Principle 11: Relations with regulators, this firm should notify us as early as possible and before it expects to use its CPB and provide a capital rectification plan. In the above example between 2015 and the end of 2018, the restrictions on distributions according to its calculated Maximum Distributable Amount (MDA) (which is required when a firm’s CET1 capital cannot meet the combined buffer – see IFPRU 10.4[3]) do not apply.
In 2019, the firm’s capital level would not be able to meet its combined buffer. At the point that a firm’s capital level cannot meet the combined buffer it would need to restrict distributions according to its calculated MDA and provide us with a capital conservation plan no later than five business days after the firm has identified that it did not meet the combined buffer (see IFPRU 10.5[4]).
Your views
We want to know what you think of our proposed approach.
Send your comments to [email protected] by 29 April 2016.