PRA consults on groups policy and double leverage

The PRA has outlined proposals on groups policy and double leverage in its latest consultation paper.

Groups policy speaks to the distinction between individual legal entities (and the particular jurisdiction they are in) and the broader multi-jurisdictional banking groups of which they form a part, and the difficulties inherent in the PRA regulating both. Groups policy is the means by which the PRA seeks to mitigate the risks of individual firms being adversely effected by its relationships with other firms in the group or by the group’s financial status as a whole.

In order to accommodate post-crisis financial reforms, the PRA proposed the following:

  • assessment and mitigation of the risks to group resilience due to the use of double leverage (where one or more parent entities in a group funds some of the capital in its subsidiaries by raising debt or lower forms of capital externally);
  • assessment and mitigation of the risks highlighted by prudential requirements applied by local regulatory authorities on overseas subsidiaries of UK consolidation groups; and
  • improved monitoring of the distribution of financial resources across different group entities.

The proposals will require updates to various Supervisory Statements and the Internal Capital Adequacy Assessment Part of the PRA Rulebook. Other proposals are currently being consulted on via another consultation paper, in an overarching attempt to update the existing policy framework and provide clarity to firms as they define their group resource allocation strategies.

The deadline for feedback to the PRA’s proposals is 8 January 2018.