Why the PRA’s pillar 2 approach is good news for investors

Author: Ben Bschor | Published: 24 Jan 2015

Market participants have widely welcomed the consultation paper (CP) on assessing capital adequacy under pillar 2, published by the UK Prudential Regulation Authority (PRA) this week.
The paper contains few new policies, but it details numerous aspects of the PRA’s approach to pillar 2 and how banks are expected to contribute to the pillar 2 dialogue with the regulator.
The use of stress tests to set pillar 2 buffer levels for banks, the quality of buffer capital, a capital surcharge for weak risk management, and disclosure rules have all been addressed.
The PRA also published several additional draft documents: pillar 2 reporting templates and instructions, a draft supervisory statement (SS) on The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) and a draft policy statement outlining the methodologies the regulator will use for setting pillar 2 capital requirements.
Pillar 2 buffers The PRA continues to...