## 1gbrea2022006

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### Overview: scope and assessment
- The Financial Sector Assessment Program (FSAP) carried out a targeted evaluation of issues relating to the effectiveness of banking regulation and supervision in the United Kingdom.
- The 2021 FSAP leverages the 2016 FSAP which concluded the United Kingdom (U.K.) had a high degree of compliance with the 2012 Basel Core Principles (BCPs) with some shortcomings.
- The 2021 FSAP reviewed progress in addressing those shortcomings and examined main supervisory and regulatory developments since the last FSAP.
- The evaluation focused on steps to minimize disruptions at the end of the Brexit transition period and on regulatory and supervisory measures introduced to contain spillovers from the COVID-19 pandemic.

### Key findings on regulatory and supervisory framework
- The United Kingdom continues to operate a sound regulatory and supervisory framework for the safety and soundness of the banking sector.
- Extremely transparent approach towards bank regulation and strong cooperation and information-sharing between the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).
- PRA has broad legal powers and uses an array of tools to implement a risk-based approach; increased intensity of supervision on non-systemic smaller firms since 2016.
- PRA has issued detailed supervisory expectations for newly licensed banks, including financial-technology focused challenger banks, and is proactively addressing climate-related financial risks.
- Senior Manager and Certification Regime (SMCR) is producing positive results, though PRA has not yet used the full range of powers provided by the framework.
- Supervisory approach remains largely principles based and flexible, demonstrated during the COVID-19 pandemic.

### Prudential and supervisory response to COVID-19
- Response was swift and comprehensive; exceptional temporary regulatory measures generally consistent with post-GFC core standards.
- Support measures yielded positive results but vigilance required as measures are removed, particularly regarding non-performing exposures and sectors including hospitality, leisure, and housing.
- Enhanced supervisory scrutiny will continue as temporary measures are withdrawn.
- Key microprudential measures (selected):
  - March 2020 — Statement on the usability of capital buffers.
  - March 2020 — Payment holiday guidance (not time-limited; will naturally fall away as payment holidays exit).
  - April 2020 — Delay implementation of Basel 3.1 standards.
  - May 2020 — Leverage ratio exemption for BBLS (remains until BBLS loans mature).
  - June 2020 — Transitional arrangements for capital impact of IFRS 9 ECL provisioning (apply until 2024).
- Outcomes:
  - Lending to non-financial corporates and households increased by +4 percent between March 2020 and March 2021.
  - Capital retained by not paying out dividends contributed to 50 basis points of common equity Tier 1 ratio of the large U.K. banks.
  - FPC concluded U.K. banks remain resilient to a wide range of possible economic outcomes despite material downside risks.
- Issues requiring continued scrutiny:
  - Buffer usability constraints (market stigma, precautionary buffers, AT1 coupon restrictions).
  - ECL provisioning transitional arrangements: "100 percent of the provisions attributable to the application of ECL provisioning are added back to CET1 capital in 2020 and 2021, this percentage being then reduced over the subsequent three years."
  - Need to phase out guidance on payment deferrals and reintroduce case-by-case loan assessment.

### Brexit-related actions, transitional arrangements, and challenges
- Key dates:
  - United Kingdom left the EU on January 31, 2020.
  - Transition period ended on December 31, 2020.
- Steps taken:
  - Onshoring of EU legislation via the European Union (Withdrawal) Act 2018 and subsequent Statutory Instruments; Temporary Transitional Power (TTP) available until March 31, 2022.
  - Introduction of Temporary Permissions Regime (TPR) allowing former EEA passporting firms to operate temporarily (up to three years) while seeking U.K. authorization.
  - Around 66 former EEA passporting firms entered the TPR.
- Post-transition complexity:
  - Prudential regime now a multilayered mix of primary legislation, statutory instruments, onshored binding technical standards, and PRA rules/guidance.
  - Main future challenge: consolidate and streamline the rulebook without reducing regulatory stringency.
- Authorization / TPR specifics:
  - Deemed authorized firms subject to same rules as U.K. firms, subject to transitional relief (e.g., branch income statement 15-month relief; whole-firm liquidity reporting required).
  - PRA must approve general manager and any Senior Management Function decision-makers.
  - Three firms outside the PRA risk appetite authorized as subsidiaries (as of mission time).

### Four high-relevance issues for effective oversight
- Preserve the primacy of the PRA’s prudential safety and soundness objective
  - Financial Services Act of 2021 added considerations PRA must have regard to when implementing Basel III; FRF Review 2021 proposes elevating long-term growth and international competitiveness as new statutory secondary objectives for FCA and PRA.
  - Recommendation: ensure PRA maintains clear focus on robust prudential standards; issue a policy statement confirming subordinated nature of "have regard to" considerations.
- Stronger on-the-ground focus on individual banks and activities
  - Current blend of cross-firm and firm-level supervision relies on offsite analytics; PRA should use full range of tools (onsite reviews, credit AQRs, S-166 skilled person reviews) more frequently, conduct in-depth investigations with more testing, and provide timely substantive feedback.
  - Only 19 of 445 credit reviews included a review of loan files since 2018.
- Major responsibility for international banking activities
  - Entity-neutral approach allowing subsidiaries or branches is largely unique and presents limitations for branch supervision (fewer tools, differing home/host views).
  - Recommendation: enhance cooperation with third-country home authorities and reassess whether the approach delivers expected supervisory outcomes.
- Resources are stretched given PRA’s range and nature of tasks
  - Budgets and staffing allocations over the past five years have remained relatively flat with only modest increases.
  - Additional resources warranted to perform more frequent and in-depth verification/testing of banks’ CIB activities and business models, intrusive risk management and asset quality reviews, and proactive review of internal models.

### Key quantitative and structural statistics
- PRA regulates around 1,500 banks and major investment firms, as well as building societies, credit unions, and insurers.
- FCA regulates nearly 60,000 firms in total.
- Subsidiaries of foreign banks hold a combined £4,017 bn of assets; branches have £8,350 bn of assets.
- PRA supervises 170 international firms from 49 countries: 50 operate as subsidiaries, 91 as branches, 29 as mixed; 19 international firms are supervised as systemic firms (covering 16 branches and 3 subsidiaries).
- Category-based supervisory processes:
  - Firms divided into five categories (1 to 5) by Potential Impact (PI) score; PIF has five stages.
  - Credit coverage requirements for assets in scope over a three-year period are between 40 and 60 percent for Category 1 firms.
- Stress exercise finding:
  - August 2020 reverse stress test suggested banks would need to incur around £120 billion of credit losses (a further £100 billion beyond provisions) to deplete aggregate end-2019 capital by 5.2 percentage points.
- PRA buffer for new and growing banks: equal to six months of projected operating expenses (used as calibration).

### Main recommendations (selected, with priority and timeline)
- Preserve primacy of PRA’s prudential objective; introduce processes/mechanisms to resolve conflicts where financial stability and other considerations may conflict; issue statement confirming subordinated nature of "have regard to" considerations.
  - Priority: High; Timeline: NT
- Estimate expected workload in key/emerging areas (internal models, complex CIB activities, financial technology, IT) and align resources.
  - Priority: High; Timeline: NT
- Streamline post-Brexit prudential rulebook consistent with core global standards; ensure TPR applications processed in due time by end of the TPR.
  - Priority: High; Timeline: MT
- Seek additional statutory powers to review/examine resilience of all critical services (including cloud services) provided by third parties.
  - Priority: High; Timeline: MT
- Implement a more active supervisory role in assessing loan classification and provisioning; conduct deep dives of models used for ECL calculation; phase out guidance on payment deferrals requiring case-by-case assessments.
  - Priority: High; Timeline: NT
- Increase resources and provide guidelines for review and calibration of IRB parameters after COVID-19.
  - Priority: High; Timeline: MT
- Consider incorporating reputational risk in the PI methodology and provide guidance on embedding climate-related financial risks when scoring firms’ risk elements.
  - Priority: Medium; Timeline: MT
- Actively consider more frequent and in-depth firm-specific onsite reviews and use S-166 reviews more proactively across a broader range of firms while building PRA capabilities (including technological skills).
  - Priority: High; Timeline: MT
- Ensure better consistency of supervisory approaches across UKDT and ARTIS; carefully consider pros/cons before adjusting supervisory intensity on non-systemic firms.
  - Priority: High; Timeline: NT
- Use the whole range of powers under SMCR and remuneration framework to ensure senior manager accountability; utilize full panoply of enforcement tools and provide supervisors with guidance on legal principles and risk factors.
  - Priority: High/Medium as specified.

### Policy analysis and implications (loan classification, ECL, and models)
- Supervisory action on loan classification and provisioning should be escalated to require firm-level case-by-case assessment rather than blanket guidance on payment deferrals.
  - Conduct supervisory deep dives of models used for expected credit loss (ECL) calculation.
  - Phase out guidance permitting broad treatment of payment deferrals progressively.
- Strengthen supervision of internal models: increase resources devoted to model review and provide clearer guidance on post‑COVID‑19 calibration of IRB parameters.
  - PRA should implement a more proactive review of internal models used for regulatory purposes.
- Improve cross-firm consistency when setting the PRA buffer and align frequency of deep dive C-SREP for all Category 1 firms.
- Monitor effects over time of shifting capital requirements from Pillar 2 capital add-ons towards buffers.
- Enhance cooperation with third-country authorities, and consider binding governance and risk-management requirements for third country branches where needed.

### Supervisory practices, governance, and operational recommendations
- Internal allocation and governance:
  - Day-to-day management delegated to the CEO; PRC reserves certain matters (e.g., rules under FSMA, annual resource reporting to Chancellor, PRA strategy).
  - Quarterly Performance Report (QPR) and Risk and Work Manager (R&WM) system used to steer and monitor supervisory activities.
- Supervisory tools and gaps:
  - Increased use of cross-firm thematic reviews; thematic work focused more on retail activities than wholesale CIB lines—suggestion to rebalance.
  - Onsite/vertical supervision is shorter and less intense than traditional extended onsite examinations; limited front-to-back testing.
  - Section 166 Skilled Persons Reviews (S-166) currently reactive; potential to use more proactively but require oversight and conflict‑free selection.
  - Lending and asset quality: AQR program paused in 2020 and expected to restart in 2021; limited AQR file review coverage prior to suspension.
- Operational resilience and outsourcing:
  - PRA issued Policy Statement on Operational resilience (PS6/21) March 2021; focus on impact tolerances for important business services.
  - Cloud outsourcing: PRA/FCA lack express statutory authority to directly review cloud providers unless contractually permitted; recommendation to seek legislative authority or mandate contractual regulatory access and hire staff with technological skills.
- Climate risk supervision:
  - PRA published SS3/19 and expects firms to have embedded supervisory expectations by year-end 2021; PRA to review firms' published climate-related disclosures in 2022.

### Enforcement framework and accountability
- PRA and FCA have extensive legal powers: sanctions under SMCR; requirements under sections 55L/55M FSMA; unlimited fines and public censure; withdrawal of approvals.
- PRA applies "comply or explain"; FCA applies "assertive supervision".
- Recommendation: provide supervisors more guidance on legal principles and risk factors to facilitate earlier and more effective use of formal enforcement powers; encourage earlier collaboration between supervisors and legal teams.

### Implementation status and priorities for supervisory improvement
- Areas ongoing or partially implemented:
  - Reputational risk scoring: ongoing changes but PI scope does not explicitly include reputational risk.
  - PRA resourcing and operating model: ongoing; resources stretched.
  - Deep-dives and firm-specific onsite reviews: partially implemented; increase needed.
  - Loan-level information and supervisory guidance: partially implemented; loan-by-loan data limited.
  - AQR and credit file coverage: partially implemented; limited number of AQRs with file reviews.
  - Requirement to set quantitative thresholds for concentration risk: not implemented.
- Suggested operational practice:
  - Incorporate flexible/unallocated hours into PRA budgets for new/unanticipated projects.
  - Periodically reassess whether entity-neutral approach to international firms delivers expected supervisory outcomes.
  - Reassess capital buffer framework for new banks periodically.

*Source: 1gbrea2022006 - EXECUTIVE SUMMARY AND RECOMMENDATIONS; 11. Implement a more active supervisory role in assessing loan classification; excerpts from UNITED KINGDOM — INTERNATIONAL MONETARY FUND.*

### EXECUTIVE SUMMARY AND RECOMMENDATIONS ________________________________________________ 6

### EXECUTIVE SUMMARY AND RECOMMENDATIONS

### Overview: scope and assessment
- The Financial Sector Assessment Program (FSAP) carried out a targeted evaluation of issues relating to the effectiveness of banking regulation and supervision in the United Kingdom.
- The 2021 FSAP leverages the 2016 FSAP which concluded that the United Kingdom (U.K.) had a high degree of compliance with the 2012 Basel Core Principles (BCPs) with some shortcomings.
- The 2021 FSAP reviewed progress in addressing those shortcomings and examined main supervisory and regulatory developments since the last FSAP.
- The evaluation focused on steps to minimize disruptions at the end of the Brexit transition period and on regulatory and supervisory measures introduced to contain spillovers from the COVID-19 pandemic.

### Key findings on regulatory and supervisory framework
- The United Kingdom continues to operate a sound regulatory and supervisory framework for the safety and soundness of the banking sector.
- The United Kingdom has an extremely transparent approach towards bank regulation.
- There is strong cooperation and information-sharing between the two main agencies: Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA).
- The PRA has a broad range of legal powers to enforce prudential standards and uses an array of tools and techniques to implement its risk-based approach.
- The PRA has taken steps to address key concerns from the 2016 FSAP and increased the intensity of supervision on non-systemic smaller firms.
- The PRA has kept an active pace in implementing reforms to enhance operational resilience and has issued detailed supervisory expectations for newly licensed banks, including financial technology focused challenger banks.
- The PRA and FCA are proactively addressing financial risks associated with climate change.
- The joint PRA and FCA Senior Manager and Certification Regime (SMCR) is producing positive results, but the PRA has not yet used the full range of powers provided by the framework.
- The approach to supervision remains largely principles based and flexible, as demonstrated during the COVID-19 pandemic.

### Prudential and supervisory response to COVID-19
- The prudential and supervisory response to the COVID-19 pandemic shock was swift and comprehensive.
- Exceptional temporary regulatory measures were generally consistent with the core standards implemented after the global financial crisis (GFC).
- The support measures have thus far yielded positive results, but vigilance is required as measures are removed, particularly regarding non-performing exposures and potential unintended macro-financial spillovers in sectors including hospitality, leisure, and housing.
- Enhanced supervisory scrutiny will continue to be needed as temporary measures are withdrawn.

### Brexit-related actions and challenges
- Important steps were taken to minimize banking market disruptions at the end of the Brexit transition period; early planning, preserving/amending EU legislation, and introduction of temporary permission regimes (TPR) resulted in an orderly transition with minimal disruptions thus far.
- Post-transition, the United Kingdom has a relatively complex regulatory structure integrating onshored EU legislation into a multilayered mix of primary legislation, statutory instruments, onshored regulations and technical standards, and PRA rules and guidance.
- Post-Brexit challenges include:
  - Streamlining the prudential framework without lowering internationally agreed requirements.
  - Completing the authorization process for former European passporting firms by the end of the TPR.
- Brexit marks a turning point with the United Kingdom assuming autonomy on all matters of regulatory policy; the PRA intends to introduce proportionality measures for firms that are neither systemically important nor internationally active.

### Four high-relevance issues for effective oversight (detailed findings)
- First: Preserve the primacy of the PRA’s prudential safety and soundness objective.
  - The Financial Services Act of 2021 specifies new considerations the PRA must have regard to when implementing Basel III standards.
  - Proposals exist to elevate facilitating long-term growth and international competitiveness as new statutory secondary objectives for the FCA and PRA.
  - It is important to ensure the PRA maintains a clear focus on robust prudential standards commensurate with structural and global realities of the U.K. banking market.
- Second: Stronger on-the-ground focus on individual banks and activities is desirable.
  - Current supervisory approach blends cross-firm supervision with firm-level oversight, relying on strong offsite risk analytical capabilities.
  - The PRA should use the full range of existing tools (onsite reviews, credit asset quality reviews, skilled person reviews) more frequently, conduct in-depth investigations with more testing, and provide timely and substantive feedback to firms.
  - High-quality, in-time bank-level supervision is increasingly important as banking products and services evolve and low-yield environments may encourage search-for-yield behaviour.
- Third: Major responsibility for international banking activities.
  - International banks, including Global Systemically Important Banks (GSIBs) undertaking Corporate and Investment Banking (CIB) activities, can operate in the United Kingdom as subsidiaries or branches.
  - The U.K.’s entity-neutral approach is largely unique and presents limitations and practical challenges for branch supervision (fewer formal supervisory tools, differing home/host views).
  - The PRA has set out a holistic approach to host supervision with extensive expectations for firms, but should further enhance cooperation with third-country home authorities and reassess whether the approach delivers expected supervisory outcomes and preserves financial stability.
- Fourth: Resources are stretched given the PRA’s range and nature of tasks.
  - Budgets and staffing allocations over the past five years have remained relatively flat with only modest increases.
  - The PRA has shown flexibility in reallocating resources but faces longer-term challenges: post-Brexit prudential rulemaking, increased number of firms after Brexit, new climate responsibilities, rapid technological change, delivery on major U.K. projects, and international standard setting obligations.
  - Additional resources are warranted to perform more frequent and in-depth verification and testing of individual banks’ CIB activities and business models, conduct intrusive risk management and asset quality reviews, and proactively review firms’ internal models.

### Main Recommendations (extracted from Table 1)
- Powers, resources, and regulatory requirements
  1. Preserve the primacy of the PRA’s prudential safety and soundness objective in principle and in practice; introduce processes and mechanisms to resolve cases where financial stability objectives and other considerations may conflict; and issue a statement confirming the subordinated nature of have regard to considerations
     - Priority: High
     - Timeline: NT
  2. Estimate expected workload in key and emerging areas - such as internal models, complex CIB activities, financial technology, and IT- and align resources and enhance capacity accordingly
     - Priority: High
     - Timeline: NT
  3. Streamline the post-Brexit prudential rulebook in a manner consistent with core global standards and ensure that applications made by firms in the TPR are processed in due time by the end of the TPR
     - Priority: High
     - Timeline: MT
  4. Ensure that non-internationally active banks remain required to comply with capital requirements broadly consistent with the principles of the applicable Basel standards
     - Priority: Medium
     - Timeline: MT
  5. Seek additional statutory powers to review and examine the resilience of all critical services (including, but not limited to cloud services) that third parties provide to regulated firms
     - Priority: High
     - Timeline: MT

- Supervisory approach
  6. Consider both incorporating reputational risk in the potential impact (PI) methodology as well as providing guidance on how to embed climate-related financial risks when scoring firms’ individual risk elements
     - Priority: Medium
     - Timeline: MT
  7. Actively consider more frequent and in-depth firm-specific onsite reviews of relevant activities and risk management practices to supplement cross firm work and proactively identify issues for timely remediation
     - Priority: High
     - Timeline: MT
  8. Share supervisory onsite reports at a level of detail appropriate for the seniority of staff at firms to increase transparency and ensure timely feedback to firms between two PSMs; provide more detailed findings and recommendations to be implemented within a given timeframe
     - Priority: High
     - Timeline: MT
  9. Use S-166 reviews in a proactive manner for a broader range of firms while increasing the PRA’s own capabilities and expertise for certain skills (including technological skills) and subject matters
     - Priority: High
     - Timeline: MT
  10. Ensure better consistency of supervisory approaches across UKDT and ARTIS where appropriate and carefully consider pros and cons before adjusting the supervisory intensity on non-systemic firms
      - Priority: High
      - Timeline: NT

*Source: 1gbrea2022006 - EXECUTIVE SUMMARY AND RECOMMENDATIONS*

### 11. Implement a more active supervisory role in assessing loan classification

### 11. Implement a more active supervisory role in assessing loan classification

### Key recommendations and implementation timing
- 11. Implement a more active supervisory role in assessing loan classification and provisioning; conduct deep dives of models used for ECL calculation; and phase out progressively the guidance on payment deferrals to require banks to assess and classify loans on a case-by-case basis — High NT  
- 12. Introduce a clear expectation that firms should set limits on their single name, geographic and sectoral risk concentrations as part of their ICAAP — Medium MT  
- 13. Implement a more proactive review of internal models; increase resources devoted to the review of firms’ internal models used for regulatory purpose and provide guidelines on the calibration of IRB parameters after COVID-19 — High MT  
- 14. Improve cross-firm consistency when setting the PRA buffer; align the frequency of deep dives C-SREP for all Category 1 firms; periodically reassess whether the capital buffer calculation framework is effective for new banks — Medium MT  
- 15. Monitor over time the effect of the decision to shift the balance of capital requirements from Pillar 2 capital add-on towards buffers — Medium MT  
- 16. Further enhance cooperation with third-country authorities, consistent with the materiality of their impact on U.K. financial stability, to maximize data and information sharing, and supervisory collaboration — High MT  
- 17. Continue to assess whether the approach to supervising international firms delivers the expected supervisory outcome — High MT  
- 18. Introduce appropriate binding requirements on governance and risk management for third country branches if it would further support the supervision of these firms — High MT  
- 19. Use the whole range of powers provided for by the SMCR and remuneration framework as appropriate to ensure that individuals holding senior manager functions are fully held accountable — High NT  
- 20. Utilize the full panoply of enforcement tools where appropriate and provide more guidance to supervisors on relevant legal principles and risk factors to consider when using these powers — Medium MT

### Findings on the supervisory and regulatory framework (extracts)
- The technical note analyzes key aspects of the regulatory and supervisory framework for banks operating in the United Kingdom as part of the 2021 Financial Sector Assessment Program (FSAP). The analysis is based on the regulatory framework in place and supervisory practices employed as of July 2021.  
- The PRA regulates around 1,500 banks and major investment firms, as well as building societies, credit unions, and insurers. The FCA is the regulator for nearly 60,000 firms in total, the vast majority of which are solo-regulated firms.  
- The United Kingdom follows a ‘Twin Peaks’ model: the PRA is responsible for prudential matters and the FCA for conduct matters. The Prudential Regulation Committee (PRC) exercises the BoE’s functions as the Prudential Regulation Authority.  
- The PRA’s statutory general objective is to promote the safety and soundness of PRA-regulated firms, with a secondary objective (SCO) to facilitate effective competition. The FCA’s strategic objective is ensuring relevant markets function well, supported by operational objectives to (i) secure an appropriate degree of protection for consumers; (ii) protect and enhance the integrity of the U.K. financial system; and (iii) promote effective competition in the interests of consumers.  
- The PRA has established a doctrine on how the SCO should be used; the SCO does not require the PRA to act in a manner incompatible with its primary objective. Since March 2014, the PRA is required to produce an annual competition report setting out how it is delivering against the SCO.  
- The Financial Services Act of 2021 added considerations the PRA must have regard to when implementing Basel III standards, including “the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities”. The FRF Review 2021 further proposes elevating facilitating the long-term growth and international competitiveness of the U.K. economy as new secondary objectives for the FCA and PRA and introducing more “have regards to” considerations.  
- U.K. authorities assert that primary objectives take precedence over the ‘have regard to’ considerations, but these additional priorities are not explicitly subordinate to the safety and soundness general objective and could increase the weight assigned to non‑prudential considerations. The PRA has published its explanation of how it evaluated specific “having regard” matters in connection with proposed Basel III rules and concluded the proposals do not have a material impact on international competitiveness.  
- U.K. financial regulators possess broad legal powers to enforce prudential standards, including authorizing firms, conducting ongoing supervision, approving appointment of senior managers, addressing compliance, and undertaking corrective actions when firms fail or are likely to fail to satisfy Threshold Conditions under FSMA.  
- The PRA and FCA communicate supervisory expectations through public approach documents (e.g., Approach to Banking Supervision; FCA Mission: Approach to Supervision), speeches, Dear CEO letters, supervisory Directorate letters, portfolio strategy letters, and a structured consultation process. The Financial Services Regulatory Initiatives Forum’s Regulatory Initiatives Grid lays out timing and operational impact of major initiatives over a 24-month horizon.

### Policy analysis and implications (relevant to loan classification and model review)
- Supervisory action on loan classification and provisioning should be escalated to require firm-level case-by-case assessment rather than blanket guidance on payment deferrals, particularly given pandemic-related forbearance. This entails:  
  - conducting supervisory deep dives into models used for expected credit loss (ECL) calculation; and  
  - progressively phasing out guidance permitting broad treatment of payment deferrals.  
- Strengthening supervision of internal models requires increased resources devoted to model review and clearer guidance on post‑COVID‑19 calibration of IRB parameters. The recommendation is to implement a more proactive review of internal models used for regulatory purposes.  
- Improving cross-firm consistency in setting PRA buffers and aligning frequency of deep dives (C-SREP) for Category 1 firms is necessary to ensure comparable supervisory outcomes across large firms and to reassess the effectiveness of capital buffer calculation for new banks.  
- Monitoring the shift from Pillar 2 capital add-ons towards buffers over time is recommended to assess impacts on capital adequacy, loss absorbency, and supervisory incentives.  
- Enhanced cooperation with third-country authorities and appropriate binding requirements for third country branches on governance and risk management can improve supervision of internationally active firms and support data and information sharing.  
- Use of the SMCR and remuneration framework, and the full panoply of enforcement tools, should be emphasized to ensure accountability of senior managers and to provide supervisors with guidance on legal principles and risk factors when using enforcement powers.

### Operational recommendations for supervisors
- Prioritize deep dives of ECL models and require case-by-case loan classification where guidance on payment deferrals exists — implement in the Near Term (NT).  
- Increase resources and issue guidelines for review and calibration of IRB parameters — High priority across the Medium Term (MT).  
- Require firms to set explicit limits on single name, geographic, and sectoral concentration risk within ICAAP — Medium MT.  
- Align C-SREP deep dive frequency for all Category 1 firms and reassess capital buffer frameworks for new banks — Medium MT.  
- Monitor and evaluate the effects of shifting capital requirements from Pillar 2 add-ons to buffers over time — Medium MT.  
- Enhance supervisory cooperation with third-country authorities proportionate to their materiality for U.K. financial stability — High MT.  
- If needed to support supervision, consider introducing binding governance and risk management requirements for third-country branches — High MT.  
- Deploy the full suite of SMCR and enforcement powers where appropriate and provide supervisors with clearer guidance on legal and risk considerations — High NT/Medium MT as specified above.

*Source: 1gbrea2022006 - 11. Implement a more active supervisory role in assessing loan classification, INTERNATIONAL MONETARY FUND.*

### 11.      The internal allocation of tasks within the PRA is clearly established. While certain

### 1gbrea2022006 - 11.      The internal allocation of tasks within the PRA is clearly established. While certain

### Internal allocation of tasks, governance and decision-making
- The day-to-day management of the PRA and implementation of the prudential regulation strategy (including the exercise of the PRA’s statutory powers) is delegated to the CEO.
- Certain matters are reserved to PRC, including certain firm-specific and policy-related issues.
- The PRC has non-delegable responsibility for:
  - annually reporting to the Chancellor on the adequacy of resources allocated to the PRA,
  - making rules under FSMA,
  - determining the PRA’s strategy,
  - reviewing the PRA’s statutory guidance about how it intends to advance its objectives in discharging its general functions.
- The delegation to the CEO expressly excludes approval of a supervisory strategy in relation to Category 1 firms and the approval of the appointment of the Chairman and CEO for several firms (including Barclays, HSBC, NatWest, Lloyds Banking Group, Standard Chartered and Santander U.K.).
- The Supervision, Risk and Policy Committee (SRPC), acting as the most senior committee below the PRC, provides advice to the CEO in the exercise of its powers.

### Monitoring, reporting and internal tools
- Current processes ensure that decisions of great importance are taken at the appropriate level so that all areas of the PRA have a chance to discuss them together at the PRC or SRPC level (example: decision to add a firm to the Watchlist) as well as during Periodic Summary Meetings (PSM) held for each firm.
- Quarterly Performance Report (QPR):
  - used by the PRC and PRA senior management to steer and monitor performance against the business plan and progress against planned supervisory activities,
  - articulated around key questions (Are we doing what we said we would? What are we achieving? What is our capacity and how are we making use of it? What are our biggest risks and how are these set against our tolerance?),
  - includes synthetic dashboards and extremely detailed information on progress and achievement, COVID-19 impact on supervisory activities, key risks, watch list, resources, etc.
- Risk and Work Manager (R&WM) system records the supervisory activities agreed by the PSM for each firm and their delivery.
- Firms’ progress against supervisory actions are reviewed by the SRPC.
- The FSAP team was provided samples of such reports that are extremely detailed.

### PRA organizational structure and specialist capabilities
- PRA supervision directorates:
  - U.K. Deposit Takers Supervision (UKDT),
  - Authorisations, Reg Tech, and International Supervision (ARTIS),
  - Insurance Supervision.
- Support directorates:
  - Prudential Policy,
  - PRA Risk and Operations,
  - Supervisory Risk Specialists (SRS).
- Supervisory Risk Specialists (SRS) provide technical expertise in specific risk disciplines to support policy development and implementation (see Appendix III).

### 2021 strategic review conclusions and implications
- Key conclusion: the PRA has performed well over the past eight years; a fundamental overhaul of the supervisory model is not required.
- Identified areas for strengthening:
  - become more risk-based,
  - deploy more consistent approaches,
  - make governance more effective,
  - improve how the PRA explains and justifies rule making,
  - increase preparedness for firms’ orderly exit,
  - improve use of data analytics and technology to supervise firms.
- Caution: adjustments that reduce the intensity of supervision on non-systemic firms or that shift balance from firm-specific to cross-firm supervision should be carefully considered.
- Early detection requires devoting necessary resources for a robust supervision program.

### Interagency cooperation mechanisms
- PRA–FCA relationship:
  - statutory framework clearly defines each agency’s remit,
  - supplemented by a Memorandum of Understanding (MoU).
- High level of cooperation where responsibilities are shared (examples: authorizations, enforcement and SMCR).
- The PRA and FCA have entered cooperative information sharing agreements with international counterparts.
- PRA participation:
  - active home and host participant in global and regional supervisory colleges,
  - trilateral information sharing and collaboration between the PRA, U.S. Federal Banking Agencies (FBAs) and the ECB/SSM is well established at the highest levels and among line supervisors.
- Recommendations from FSAP team:
  - continue and expand joint examination with U.S. FBAs and other supervisory thematic and other reviews of international bank subsidiaries and branches,
  - preserve positive culture as generational changes occur,
  - build on the trilateral approach to further improve bilateral relationships with other G-SIB supervisors and EU national competent authorities supervising firms with a U.K. presence,
  - greater collaboration would help address challenges posed by international banking firms and affiliates.

### Adequacy of resources and budgeting
- Funding and constraints:
  - PRA is funded by levies upon regulated firms.
  - Statutory principles in FSMA require the PRA to use its resources in the most efficient and economical way.
  - Annual budget developed by the PRA, reviewed and adopted by the PRC, and subject to approval by the BoE’s Court.
  - PRC must report to the Chancellor on adequacy of resources and independence from the rest of the Bank.
- Budgeting process:
  - bottom-up: functional divisions propose supervisory activities and necessary resources;
  - budget requests reviewed and adjusted against the proposed PRA budget and the levy.
  - budget is reviewed and adjusted periodically during the budget year; reprioritisations may reduce or delay deployment of resources.
  - recent reprioritisations related to EU withdrawal structural changes and responding to COVID-19.
- Current resource situation:
  - Budgets and staffing allocations over the past five years have remained relatively flat with only modest increases.
  - Resources are stretched; fixed and newly identified supervisory objectives may be delayed due to budget constraints.
  - Brexit-related work and COVID-19 response required reallocation of resources.
  - Future pressures: new post Brexit prudential rulemaking responsibilities, new climate change responsibilities, delivery on major projects, participating in international standard setting bodies while maintaining adequate bank supervision.
- FSAP team view on resourcing needs:
  - additional resources warranted in specific areas to perform more frequent and in-depth work on verification and testing of individual banks’ corporate and investment banking (CIB) activities and business models,
  - conduct more intrusive risk management and asset quality reviews,
  - proactively review firms’ internal models.
- Suggested budget practice:
  - incorporate more flexible or unallocated hours into its budget for new projects and unanticipated or newly emergent risks.

### Recommendations (explicit)
- Preserve the primacy of the PRA’s prudential safety and soundness objective both in principle and in practice.
- Introduce processes and mechanisms to address cases where financial stability objectives and other considerations may conflict.
- Issue a policy statement confirming the subordinated nature of ‘have regard to’ considerations.
- Revise the PRA’s estimate of future workload and align resources to it, given new rulemaking responsibilities, deferral of planned supervisory activities due to COVID-19 and the need for more intrusive supervisory practices.
- Further enhance cooperation with third-country authorities, consistent with the materiality of their impact on U.K. financial stability, to maximize data and information sharing, and supervisory collaboration.

### Regulatory framework for banking supervision
- The Statutory Requirements and the PRA Rulebook contain binding rules for PRA-regulated firms.
- Most prudential requirements for banks and investment firms were included in EU legislation before the United Kingdom’s departure from the EU and the expiry of the Brexit transition period on December 31, 2020.
- Policy framework includes Supervisory Statements and Statements of Policy.
- Post-Brexit approach:
  - onshoring of EU legislation converted applicable EU legislation into U.K. law via the European Union (Withdrawal) Act 2018;
  - PRA Rulebook updated to reflect the United Kingdom’s withdrawal from the EU and the end of the transition period;
  - U.K. authorities do not intend to keep detailed regulatory provisions in law; proposal to “move back to a more British style of regulation, with the rules made by regulators rather than set out in law”.
  - HMT has launched the FRF review; one proposal is to empower U.K. financial regulators to set out regulatory and supervisory requirements that apply to firms.
  - The Financial Services Act of 2021 delegates rule making powers to implement Basel 3 standards to the PRA within a policy framework set out in the law.
- PRA’s proposals on proportionality:
  - move to a graduated regime and introduce proportionality measures into the prudential framework,
  - Discussion Paper (DP) proposes options for a simpler but no less resilient prudential framework for banks and building societies that are neither systemically important nor internationally active,
  - intention: develop a strong and simple framework fully consistent with the Basel Core Principles (BCPs) but simpler than the Basel standards for large and internationally active banks,
  - design and implementation will likely take a number of years to complete.
- Guidance on proportionality:
  - efforts to introduce proportionality should be consistent with established safety and soundness best practices and principles,
  - all segments should be subject to rigorous prudential standards,
  - focus on reducing excessive compliance costs without reducing the rigor of regulation,
  - BCPs specify that capital requirements applied to non-internationally active banks should be broadly consistent with principles of the applicable Basel standards relevant to internationally active banks.

### Measures introduced in the context of Brexit
- Key dates:
  - United Kingdom left the EU on January 31, 2020.
  - Transition period ended on December 31, 2020.
- Actions taken to minimize disruptions:
  - Onshoring process of amending EU legislation and regulatory requirements so they work in a U.K.-only context has been completed.
  - U.K. regulators given power to make transitional provisions to financial services legislation for a temporary period (Temporary Transitional Power (TTP)).
  - Withdrawal from the EU does not affect the implementation of the Basel standards in the United Kingdom.
- Transitional regimes for EEA firms:
  - Temporary permissions regime (TPR) allows EEA firms which had previously used the EEA passport to continue operating temporarily in the United Kingdom (for up to three years) within the scope of their previous passport permission while seeking permanent authorization from U.K. regulators.
  - Firms under the TPR are treated as if they have U.K. authorization and are subject to the same regulatory and supervisory framework as any U.K. regulated firm.
  - Firms that did not submit an application for authorization or fail to obtain one within the TPR period have their temporary permissions cancelled.
  - The Financial Services Contracts Regime enables such firms, or firms that did not enter the TPR and still have regulated business in the United Kingdom, to run off and wind down their U.K. business in an orderly fashion.

*Source: 1gbrea2022006 - 11.      The internal allocation of tasks within the PRA is clearly established. While certain*

### 24.      Steps the U.K. authorities have taken resulted in an orderly transition for the banking

### 24.      Steps the U.K. authorities have taken resulted in an orderly transition for the banking sector at the end of the transition period

### Transition outcome and preparatory actions
- U.K. authorities preserved and amended EU legislation and introduced temporary regimes, supported by extensive stakeholder mobilization and communication efforts.
- U.K. financial regulators established a central coordination unit to monitor, respond, and communicate on Brexit-related matters.
- The PRA and the FCA engaged with firms through monthly roundtables, webinars, speeches, and Dear CEO letters to encourage operational readiness.
- Result: No significant disruptions linked to the United Kingdom’s withdrawal from the EU have been reported so far.
- U.K. and non-U.K. GSIBs anticipated and prepared for a no-deal scenario for financial services coupled with no equivalence decisions from the EU; U.K.-based firms established legal entities in the EU and migrated EU clients and related business before January 1, 2020.

### Post-transition regulatory framework: complexity and challenges
- The prudential regime is governed by piecemeal legal provisions combining:
  - primary legislation,
  - a range of statutory instruments,
  - onshored binding technical standards,
  - PRA rules and guidance.
- The PRA and FCA expect firms to make every effort to comply with EBA’s guidelines to the extent they remain relevant.
- Main future challenge: consolidate banking services legislation and regulation and streamline the regulatory rulebook where necessary without reducing the stringency of financial regulation.

### Temporary Permission Regime (TPR)
- Around 66 former EEA passporting firms have entered the TPR with a view to becoming authorized as third country branches.
- Key features and requirements:
  - Deemed authorized firms must comply with the same rules that apply to third country branches, subject to transitional relief (the branch income statement is subject to a 15-month transitional relief but firms in the TPR have to submit whole-firm liquidity information).
  - PRA proposed firms will not need to meet the expectations introduced in SS 5/21 immediately but must do so as soon as practicable and in any event by the time they exit the TPR.
  - A decision making and governance process has been established; the PRA is working on an indicative timeline for decisions based on preparedness and complexity of TPR firms’ applications.
  - Detailed information is being collected to process the applications (core information requested includes explanation of local governance, group strategy, key performance metrics, 5 years of financial projections (P&L and balance sheet), most recent presentation to rating agencies, and most recent capital and liquidity reports submitted to HSS).
  - At the time of the IMF mission in June 2021 two decisions had been undertaken; since the review more decisions have been processed.
  - The PRA must approve the general manager and any Senior Management Function (SMF) decision-makers.
  - Three firms outside the PRA risk appetite have been authorized as subsidiaries.
  - The PRA is implementing its Continuous Assurance supervisory approach; supervision intensity is calibrated to the systemic importance of the branch and the balance of work will shift from authorization to ongoing supervision as applications progress.

### Onshoring EU law and Temporary Transitional Power (Box 1: Brexit and Banking Services)
- Preserving and amending EU law (onshoring process):
  - All relevant EU and EU-derived legislation as they stood at the end of the Brexit transition period, including binding technical standards, have been retained as U.K. law by the EU (Withdrawal) Act 2018, as amended by the European Union (Withdrawal Agreement) Act 2020.
  - Amendments to rules and requirements have been made where necessary by HMT or U.K. financial regulators using powers under the Withdrawal Act via Statutory Instruments (SI).
  - The scope of this power is strictly limited to preventing, remedying, or mitigating any failure of retained EU law to operate effectively or any other “deficiency” in retained EU law.
  - Onshoring replicated roles formerly exercised by EU bodies (for example, the EU Commission’s role in making equivalence determinations was transferred to HMT).
  - Onshoring changes can require new consolidation levels for U.K. groups that sit below an EU parent institution.
- Temporary Transitional Power (TTP):
  - TTP allows the PRA and the FCA to delay the application or modify firms’ regulatory obligations where they changed as a result of onshoring, for a temporary period until March 31, 2022 (pursuant to the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019).
  - PRA updated its Rulebook and published transitional directions delaying application of many onshoring changes for 15 months after the end of the transition period; firms continue to be subject to pre-exit requirements unless otherwise stated.
  - Examples during TTP:
    - banks continue to treat EU27 exposures and assets preferentially under applicable capital frameworks and CRR liquidity and large exposure regimes;
    - firms continue to report and disclose regulatory data on the same basis as before the end of the transition period;
    - U.K. groups that are part of EEA headquartered banking groups do not need to comply with consolidated liquidity requirements at the U.K. level.
  - Certain exceptions where TTP will not delay onshoring changes include contractual recognition of bail-in rules, stay in resolution rules and Financial Services Compensation Scheme (FSCS) rules, obligations relating to the securitization regulation, and several specific transitional provisions.
  - Certain FCA obligations took effect from January 1, 2021 (for example reporting obligations under EMIR, MIFID, Market Abuse Regulation, and mortgage lending).

### Implementation of Basel standards post-Brexit
- Withdrawal from the EU does not affect implementation of the Basel standards in the United Kingdom.
- CRR as amended by CRR II was converted into retained U.K. law in December 2020 and CRD V was transposed into domestic law with phased implementation.
- Some Basel III standards contained in CRR II that do not enter into force until June 2021 were not converted on December 31, 2020 and will be implemented separately.
- PRA actions:
  - February 2021: consultation paper (CP5/21) on remaining elements of Basel III (exclusive of changes relating to the leverage ratio).
  - July 2021: policy statement (PS 17/21) with final policy on these elements; requirements will apply from January 1, 2022.
  - FPC consulted on proposed changes to the U.K. leverage framework; PRA consulted on implementation with date aligned to January 1, 2022.
  - PRA intends to implement the Fundamental Review of the Trading Book (FRTB) at a future time in line with international timelines.
  - PRA has not yet started consultation on remaining elements of the Basel III Reforms (Basel 3.1) that have been delayed by the BCBS by one year.

### Regulatory response to the COVID-19 crisis
- Objectives: maintain safety and soundness of PRA-regulated firms, ensure banks continue to lend to households and corporates, and mitigate excessive procyclicality.
- Key measures and actions:
  - Following the PRC’s decision in March 2020 to set the countercyclical capital buffer (CCyB) at zero percent, the PRA and FPC encouraged banks to use capital and liquidity buffers to absorb losses and maintain key financial services.
  - PRA provided guidance on payment holidays for accounting and regulatory purposes to improve consistency and avoid significant overstatement of ECLs.
  - PRA exerted “friendly pressure” via Dear CEO letters to suspend dividends and share buybacks until the end of 2020 and cancel payments of outstanding 2019 dividends; these measures were introduced in March 2020.
  - Additional measures in 2020 and 2021 included:
    - transitional arrangements to smooth ECL accounting impact on regulatory capital;
    - delay of the implementation of the Basel 3.1 standard by one year;
    - exclusion of loans under the Bounce Back Loan Scheme (BBLS) from the leverage ratio exposure measure;
    - actions to address excessive procyclicality in market capital requirements.
  - Supervisory practices were adjusted to reprioritize, downsize or postpone less imperative planned supervisory work.

### Outcomes and remaining issues from COVID-19 measures
- Positive results:
  - FPC concluded U.K. banks remain resilient to a wide range of possible economic outcomes despite material downside risks.
  - Lending to non-financial corporates and households increased by +4 percent between March 2020 and March 2021.
  - Payment deferrals provided immediate relief and avoided pushing many borrowers into insolvency; guidance helped banks manage deferrals swiftly and broadly.
  - Capital retained by not paying out dividends contributed to 50 basis points of common equity Tier 1 ratio of the large U.K. banks.
  - No major disruptions reported; prior supervisory work on operational risk and business continuity proved helpful.
- Exit and unwinding:
  - U.K. financial regulators have not formalized a detailed exit strategy, but unwinding of exceptional measures has started; policy documents and statements specify duration and review processes.
  - Some changes naturally time-limited (e.g., delay of Basel 3.1, neutralizing ECL provisioning impact on CET1).
- Issues requiring continued scrutiny:
  - Buffer usability:
    - Conversations suggest U.K. banks would have been reluctant to use capital buffers if forced to choose, due to fear of market stigma, desire to keep precautionary buffers, and to avoid automatic restrictions on payment of AT1 coupons.
    - Most banks entered the crisis with strong capital positions and improved capital adequacy ratios while maintaining large headroom above buffer requirements.
    - Addressing buffer usability is constrained and should be tackled internationally rather than solely domestically.
  - ECL provisioning:
    - Transitional arrangements: "100 percent of the provisions attributable to the application of ECL provisioning are added back to CET1 capital in 2020 and 2021, this percentage being then reduced over the subsequent three years."
    - As transitional arrangements phase out, the impact of ECL provisioning will materialize progressively; banks used a wide range of provisioning approaches during the crisis, so more work is needed on ECL provisioning.
  - Capital distribution:
    - The largest U.K. banks were authorized in December 2020 to recommence dividend distribution within certain constraints; restrictions were lifted completely in July.

*Source: 1gbrea2022006 (IMF)*

### 2021. The PRA has been prudent, as the results of stress tests of banks’ capital positions

### 1gbrea2022006 - 2021. The PRA has been prudent, as the results of stress tests of banks’ capital positions

### Capital positions, stress tests, and buffer usability
- Stress tests of banks’ capital positions highlighted that banks are resilient to a wide range of economic outcomes and able to support the economy; these results were used to decide that an extension of the exceptional and precautionary action taken in March 2020 was no longer necessary.
- The transition to the standard approach has been gradual through 2021.
- Going forward, the PRA should:
  - Continue to routinely challenge all banks' capital projections in a forward-looking manner as part of the Supervisory Review and Evaluation Process (SREP) and annual stress tests.
  - Assess the credibility of mid-term capital plans including dividends distributions.
- Findings on actual capital and risk-weighted assets (RWAs):
  - Banks maintained strong capital positions due to the range of support measures.
  - RWAs have not increased materially, and substantial losses have not materialized so far.
  - This may change as support measures are unwound and IRB parameters are recalibrated.
- Buffer usability and lending behavior:
  - If there were impediments to buffer usability, banks with capital levels closer to breaching the CCB might reduce lending to avoid using their buffers.
  - Preliminary results of the analysis conducted by the PRA show lower lending growth for low headroom firms on average.
  - Recommendation: continue gathering tangible evidence as the crisis unfolds and analyze whether banks’ lending pattern differs depending on firms’ headroom above buffer requirements.

### Guidance on payment deferrals and accounting for SICR
- The guidance on payment deferrals has remained in effect since June 2020.
- PRA guidance authorized firms to make holistic assessments where sufficient borrower-specific information is not available; such assessments can be based on information made available after the payment deferral is taken up.
- As of August 2020 the PRA confirmed the guidance is still considered relevant.
- As information availability improved since mid-2020 and economic prospects clarified, the PRA should require banks to:
  - Review all exposures on a case-by-case basis.
  - Assess borrowers’ unlikeliness to pay and whether loans have suffered a significant increase in credit risk (SICR), including upon restructuring, in accordance with applicable prudential and accounting rules.
- The guidance on treatment of loans with payment deferrals should be phased out progressively by reintroducing case-by-case assessment in accordance with pre-crisis requirements.

### Key microprudential measures introduced in response to the COVID-19 crisis (Table 2)
- March 2020 — Statement on the usability of capital buffers
  - Exit strategies: N/A
- March 2020 — Payment holiday guidance – accounting treatment and definition of default
  - Exit strategies: The guidance is not time-limited but will naturally fall away as payment holidays exit
- March 2020 — Temporary permission to offset capital increases due to higher VaR multipliers with reductions in risks-not-in-VaR requirements
  - Exit strategies: The temporary approach was withdrawn in September 2020; firms are required to formally apply for exceptions to be discounted under the new CRR Article 500c
- March 2020 — Restrictions on capital distributions
  - Exit strategies: The PRA decided in December 2020 that banks can return to paying dividends but within restrictions
  - Restrictions were lifted in July 2021.
- April 2020 — Delay implementation of Basel 3.1 standards
  - Exit strategies: N/A
- April 2020 — Decision to maintain firms’ Systemic Risk Buffer (SRB) rates at the rate set in December 2019 until December 2021
  - Exit strategies: The PRC agreed in November 2020 to freeze the SRB rates for another year until December 2022
- April 2020 — Delayed submission of certain regulatory returns where the original remittance deadlines fall on or before May 31, 2020
  - Exit strategies: The PRA indicated in June 2020 that it would expect on time submission for future regulatory reporting as firms had time to adjust to new ways of working
- May 2020 — Leverage ratio exemption for BBLS
  - Exit strategies: The exemption will remain in place until the loan made under the BBLS mature
- May 2020 — Decision to set Pillar 2A requirements as a nominal amount, instead of a percentage of total RWAs
  - Exit strategies: The PRA will set Pillar 2A as a nominal amount in the 2020 and 2021 SREP. Nominal Pillar 2A will roll off over time after end-2021 in firms’ subsequent SREPs
- June 2020 — Transitional arrangements for capital impact of IFRS 9 ECL provisioning
  - Exit strategies: Transitional arrangements apply until 2024. This measure introduced by the EU in the CRR “Quick fix” became directly applicable and was retained as U.K. law as the end of the transition period
- February 2021 — Delayed submission of annual reports by up to two months
  - Exit strategies: Delay accepted where the remittance deadlines fall on or before July 31, 2021

*Source: Prudential Regulation Authority.*

### Recommendations (section D)
- Authorities are strongly encouraged to further enhance the prudential framework by:
  - Streamlining the post-Brexit regulatory framework in a manner consistent with core standards and ensure that applications made by firms in the TPR are processed in due time.
  - Continuing to ensure that banks maintain capital requirements broadly consistent with the Basel standards.
  - Phasing out progressively the guidance on treatment of loans with payment deferrals by reintroducing a case-by-case assessment in accordance with pre-crisis requirements.

### Supervisory approach and PRA practices
- Core supervisory principles (judgement-based, forward-looking, risk-based, proportionate):
  - Judgement-based: supervisors reach judgements on firm risks, risk to PRA objectives, Threshold Conditions, and remedial actions.
  - Forward-looking: firms assessed under current and plausible future risks.
  - Risk-based: focus on firms/issues posing greatest risk to U.K. financial stability; supervisory frequency and intensity scale with risk.
  - Proportionate: intensity of PRA analysis and expectations scale with nature, scale, and complexity of firms.
- Firm categorization and intervention frameworks:
  - Potential Impact Score (PI score): firms divided into five categories (1 to 5). Category 1 represents most significant firms; Category 5 represents firms with almost no individual capacity to cause disruption.
  - PI scores are calculated on an annual basis.
  - Proactive Intervention Framework (PIF) indicates proximity to failure; five PIF stages. Stage 1 = low risk to viability; Stage 5 = firms in resolution or being actively wound up.
  - If PIF stage is PIF 3 or above, supervisors consider adding firm to the Watchlist.
- Periodic Summary Meeting (PSM) process:
  - PSM is the annual oversight process through which PRA senior management monitors supervisory teams’ progress and proposals for supervisory strategy.
  - PSMs are held for all categories of firms on an annual basis. PSMs approve supervisory workplans, PI and PIF scores, risk matrices, and Threshold Conditions review.
  - For largest firms, PSM decisions and follow-up letters are approved at the PRC level, chaired by the governor of the BoE. The PRA presents PSM findings to the board of directors of Category 1 UKDT firms annually (presented by the deputy governor). The FCA attends PSMs for relevant firms.
- Areas for improvement in PSMs and supervisory reporting:
  - PSM packs for banks with significant CIB activities do not always include: (i) analysis of the P&L, (ii) analysis of main contributors (which business line, which desk), (iii) identification of fast-growing desk/activities, (iv) indication whether these activities are well understood or require in-depth work.
  - For Category 2-5 firms, reviews conducted outside the annual visit cycle (e.g., credit Asset Quality Review (AQR)) are communicated via the annual PSM letter following the annual visit, which may delay feedback. Detailed credit AQR reports are not shared with the firm; only main findings are included in the PSM letter.
  - For branches, PSM focus can be overly group-centric and may lack necessary detail on the branch itself.
  - In one instance, important weaknesses flagged in the PSM pack were omitted from the key risks and key messages discussed with the Board and included in the PSM letter.
- Scope and intensity of supervisory program:
  - Determined on a risk-based, proportionate basis. Tools include desk-based assessments, short onsite visits, thematic reviews.
  - Continuous Assessment Activities include annual business plan assessment, regular reviews of capitalization and liquidity, review of regulatory returns, annual supervisory assessment visit for Category 2-4 firms.
  - Minimum requirements are high level and provide flexibility; intensity higher for Category 1 and Watchlist firms. No mandated minimum scope or frequency for particular reviews; performed depending on firm risk profile.
  - Emphasis on frequent meetings with firm senior managers; recommendation to increase engagement with lower level or front-line staff to reveal issues not visible to senior management.
  - Supervisory remediation tools include written communications, Section 166 Skilled Persons Reviews (S-166 Reviews), and enforcement investigations.

### Climate-related financial risk supervision
- The PRA and FCA are proactively addressing financial risks associated with climate change and are cooperating with the BoE.
- Key initiatives and timelines:
  - The PRA and FCA co-convened the Climate Financial Risk Forum (CFRF) in March 2019; CFRF has published a guide with practical tools on climate risk management, scenario analysis, disclosure, and innovation.
  - The U.K. joint Government-Regulator TCFD Taskforce published an interim report and roadmap setting mandatory climate-related disclosures across the U.K. economy by no later than 2025.
  - The PRA will perform a review of firms' published climate-related disclosures in 2022 and, based upon the review, decide whether to publish for consultation measures to require PRA firms to improve quantity, quality, or consistency of climate-related disclosures.
  - The PRA has published supervisory expectations on embedding climate risk into governance, risk management, scenario analysis, and disclosure (SS3/19).
  - In a July 2020 Dear CEO letter, the PRA set a deadline of year-end 2021 for firms to have fully embedded the PRA's supervisory expectations on climate.
  - The PRA will perform a review in 2022 of firms' published climate-related disclosures.
- SRS review findings in H1 2021:
  - Progress: climate risk governance frameworks are largely in place; climate strategies are being defined.
  - Challenges: tools and metrics are being developed; only one firm had a clear statement of climate risk appetite; no firm has established a risk limit framework; capital modelling for climate risk is in its infancy.
- PRA actions and next steps:
  - Prepare and use a Supervisory Guidance Pack to support supervisors engaging firms on climate-related financial risk and embedding SS3/19 by end-2021.
  - Further guidance, more training, and an update of PRActice are expected.

*Source: Prudential Regulation Authority.*

### 39.      Over recent years, the PRA has made broad and increased use of cross firm thematic

### 1gbrea2022006 - 39. Over recent years, the PRA has made broad and increased use of cross firm thematic reviews

### Thematic reviews: scope, use, and limitations
- The PRA has increased use of cross-firm thematic reviews to better understand risk to the safety and soundness of the U.K. financial sector and to benchmark individual firms against the spectrum of best to worst practice.
- Examples of thematic reviews:
  - Review of credit cards, unsecured personal loans, and car finance (2017).
  - Fast Growing Firms (FGF) review of a cohort of 20 banks which were growing at greater than 10 percent on an annual basis and held between £1bn and £45bn of assets (2019).
  - COVID-19 related thematic reviews in 2020: Buy-to-Let mortgage thematic review; review of potential fraud and credit risk in firms’ BBLS portfolios; treatment of retail payment holidays.
- Assessment of the second line of defense is an integral part of most thematic reviews.
- Communication and follow-up:
  - Outcomes are communicated through letters highlighting main (generic) findings for the group of firms under review.
  - Letters are not tailored to individual firms in the cohort that might benefit from written feedback on firm-specific findings.
  - Thematic reviews have resulted in supervisory statements and/or additional work (example: buy-to-let mortgage thematic review focused on a few firms subject to the FGF review).
- Observations and guidance:
  - Cross-firm thematic reviews have largely focused on retail activities and somewhat less on wholesale CIB business lines; the PRA should reconsider this balance.
  - Supervisory expectations should not be set solely against best practice within a peer-group (relative terms) and should remain anchored in rules or guidance (absolute terms).

### Offsite analytics, Horizon Scanning, and peer analysis
- The PRA increasingly relies on offsite work to identify key risks, trends, and firm outliers; significant data processing is undertaken to produce routine data analysis reports monitoring firms’ risks and performance.
- Strengths:
  - Detailed briefings and dashboards consider market developments, sector performance, and cross-firm peer analysis.
  - Inputs from several Working Groups focusing on main risks, ARTIS and UKDT Risk Committees analyze a range of key and emerging risks across financial and operational resilience concerns.
  - For non-systemic Category 2-4 firms, peer analysis data and trend analysis play an important role in supervisory approach.
- Horizon Scanning:
  - Developed since 2017; led by a small central team (PRA Horizon Scanning Hub) using Bank-wide expertise to develop material for PRA senior management to decide next steps and priorities.
  - Example outcome: investigation into drivers of declining trends in U.K. banks’ modelled mortgage risk weights led to further analysis and proposals, eventually prompting a Supervisory Statement setting out PRA expectations for mortgage IRB models.

### Onsite/vertical supervision, testing, and communication gaps
- Supervisory approach combines horizontal and vertical work, but the vertical component could be reinforced.
  - The PRA does not rely on a dedicated team of examiners who stay onsite for extended periods, nor maintain a permanent presence at supervised firms.
  - PRA staff visit firms for specific meetings, perform data analysis and drafting within the PRA; visits are regular but typically shorter and less intense than onsite examinations.
- Impacts and limitations:
  - This approach affects depth and breadth of some reviews, ability to engage in testing, and granularity of certain findings and recommendations.
  - Certain firm-specific reviews do not include very detailed findings and usually do not contain recommendations to be implemented within a given timeframe.
  - Conclusions are not always shared in a timely fashion; communication with executive staff is concise and strategic but often lacks detailed reports (credit AQRs and detailed reports from SRS are not communicated to firms).
  - Communication typically does not reference applicable regulation and/or guidance, which would clarify PRA expectations.
- Testing and transaction review shortfalls:
  - Only 19 of 445 credit reviews have included a review of loan files since 2018, raising questions given the importance of transaction testing to assess credit risk management processes.
  - Given complexity of CIB activities (exotic derivatives, correlation portfolios, prime brokerage, etc.), deeper product-level understanding, testing, and front-to-back reviews are critical.
  - Evidence of effective use of onsite firm-specific reviews such as front-to-back reviews is rather limited; more in-depth investigations would help ensure corrective actions are introduced.
- Recommendations on firm-specific engagement:
  - Firm-specific findings, detailed recommendations and requested action plans could be communicated more often through individual letters as part of or following thematic reviews.
  - Ensuring firms take remedial actions in a timely fashion requires issuing firm-specific recommendations to be implemented within a given timeframe.

### Use of Section 166 Skilled Persons Reviews (S-166)
- Both the PRA and FCA can outsource supervisory activities to third parties under section 166 of the FSMA; frameworks exist for selection, permissible uses, and reporting.
- Current practice:
  - S-166 Reviews are reactive; launched when PRA has specific concerns (example use where supervisors observed chronically poor reporting).
  - Public reports show limited use to date.
- Potential and caveats:
  - Increased use of S-166 Reviews could supplement the PRA’s workplan given strained resources and permit greater review of loan files and verification of regulatory reports and firm management information systems used in offsite reviews.
  - PRA could explore using S-166 more proactively and across a broader range of firms while internalizing more competencies.
  - S-166 Reviews require effective oversight, must be free of conflicts of interest, and are not a substitute for supervisors’ independent judgment or a long-term solution to inadequate skill sets within PRA staff.

### PRA response and supervisory adaptations during COVID-19
- Organizational response:
  - Two internal groups were established: COVID-19 Supervisory Taskforce (Supervisory TF) and COVID-19 Policy Taskforce.
  - Six key horizontal workstreams initiated: Operational Resilience; Funding and Liquidity; Credit; Traded and Counterparty Credit Risk; Capital; and Troubled Firms.
- Prioritization and operational adjustments:
  - The PRA adjusted supervisory priorities to focus on credit risk, liquidity risk and operational risk.
  - To free operational capacity in firms, several supervisory work programme areas were deprioritized; examples: annual stress test (AST) cancelled, governance reviews and business model reviews postponed; PSM were refocused on the most important risks.
- Enhanced monitoring and data collection:
  - Frequency of meetings and interactions with firms increased significantly; thematic reviews and desktop stress test exercises were conducted.
  - Specific IFRS 9 data collection was undertaken to understand consistency of firms’ approaches; conducted quarterly through 2020 and to continue through 2021, covering UKDT Category 1 firms and around 15 selected smaller firms and including firms’ economic scenarios and Expected Credit Loss (ECL) estimates.
  - Analysis of firms’ ECL supported by quarterly calls to understand material changes in forward-looking scenarios, modelled outputs and Management Overlays.
- Stress testing and scenario analysis:
  - The August 2020 “reverse stress test” suggested banks would need to incur around £120 billion of credit losses (that is, a further £100 billion of losses beyond those already provisioned for) in order to deplete aggregate end-2019 capital by 5.2 percentage points to a level usually seen in the AST, such as the 2019 stress test (in which banks demonstrated they could continue to lend).
  - Desktop stress test exercises:
    - Two desktop stress test exercises were conducted in May and August of 2020 for major U.K. firms.
    - Desk Based Stress Testing (DBST) was undertaken in 2020 for nearly 100 non-systemic banks and building societies using regulatory data only; results used to rank order firms for riskiness and identify outliers for further review (not to set individual capital buffers). A further DBST is planned in 2021.
- Monitoring and targeted reviews:
  - Temporary data requests early in the pandemic provided information on operational impact, payment moratoria and forbearance, new lending, government backed lending, and for category 2-4 firms core capital and liquidity data.
  - Two thematic reviews on exposures to SMEs and one thematic review on asset quality of payment holiday portfolios were carried out across UKDT Category 1 firms and a selection of non-systemic firms.
  - ARTIS and UKDT maintain troubled firm dashboards; UKDT introduced heat maps with 4 key inputs. 55 firms were identified as potentially more vulnerable to a COVID19 stress and some were subject to enhanced monitoring.
- Outstanding needs as COVID-19 unfolds:
  - Important to ensure: (i) adequate loan classification and provisioning via more frequent credit file reviews; (ii) better understanding of ECL models through deep dives; (iii) issuance of guidelines on recalibration of IRB models; and (iv) revision of guidance on payment deferrals.
  - For retail assets, work launched on provisions has not been completed; approach will assess (i) overall provisions in aggregate and (ii) comparative provision levels across banks to highlight outliers. Once retail asset approach is finalized, PRA plans to follow with an approach for assessing corporate assets.

*UNITED KINGDOM — INTERNATIONAL MONETARY FUND (excerpt).*

### 45.      The U.K. financial regulators are the host of a very large financial centre. All non-U.K.

### 45.      The U.K. financial regulators are the host of a very large financial centre

### Scale, structure, and systemic importance
- All non-U.K. GSIBs are active in the London market; around one-fifth of global banking activity is undertaken in the United Kingdom.
- ARTIS firms account for over half of U.K. banking assets.
- Subsidiaries of foreign banks hold a combined £4,017 bn of assets while branches have £8,350 bn of assets.
- The PRA is responsible for the supervision of 170 international firms which operate in the United Kingdom, from 49 countries.
- Firms can operate as subsidiaries (50 firms), branches (91 firms) or through a mixed model of branches and subsidiaries (29 firms). 19 international firms are supervised as systemic firms (covering 16 branches and 3 subsidiaries).

### Host-supervisory objectives and stance
- The U.K. authorities recognize both the advantages of hosting a large financial centre (growth and trade) and the risks (the domestic economy is more vulnerable to international shocks).
- The PRA states a global responsibility to maintain high prudential standards in the United Kingdom and emphasizes that openness must be accompanied by financial and operational resilience.
- The PRA considers it largely impossible to supervise a subsidiary or a branch without looking at the U.K. entity in the context of the wider group; supervisory strategy does not treat ARTIS firms as completely “stand alone” entities and permits high integration with non-U.K. groups provided PRA rules and expectations are met.
- The PRA gives weight to the positive assessment of home state equivalence as a pre-requisite for international firms to operate in the United Kingdom.
- The PRA is “equally tolerant of wholesale CIB firms operating as interdependent subsidiaries or branches”.

### Supervisory framework, tools, and cooperation
- The PRA published a Supervisory statement on the PRA’s approach to branch and subsidiary supervision (SS 5/21) clarifying openness to highly integrated firms operating as branches and subsidiaries if they are resilient, appropriately controlled, and governed, meet the PRA’s Threshold Conditions and are capable of being effectively supervised.
- The PRA may place a degree of reliance on the home state supervisor (HSS) for certain aspects of supervision (as set out in SS1/18 and SS5/21). Reliance includes information sharing and assessments of home state equivalence.
- The PRA has classical MoUs with many regulators (including ECB, EBA, U.S., Swiss and Japanese authorities) and has agreed more detailed “splits of responsibilities” with a number of authorities to improve clarity over supervisory coordination.
- The PRA has developed a trigger framework to identify if collaboration with an HSS is not delivering required supervisory outcomes.
- The PRA has reached a steady state level of enhanced cooperation with the vast majority of HSS (more than 50).

### PRA supervisory practice and actions
- The PRA’s supervisory process aims to achieve the same supervisory outcome for ARTIS firms as for domestic firms, but using different tools tailored to branches and subsidiaries.
- The PRA expects an open and transparent exchange of supervisory information and views (in a college format, and/or bilaterally), including regular dialogue with the HSS on the relative importance of the U.K. firm to the overall group and on material risks.
- Subsidiaries and branches are subject to the PSM process and are included in thematic reviews.
- The PRA obtains granular information on group risk profiles (e.g., safety and soundness of the parent, groupwide stress testing, recovery plans, capital, liquidity, and high frequency P&L) and joint work and joint reviews with HSS are common.
- The PRA has taken supervisory actions (changes in booking arrangements, changes in governance arrangements) and may impose limitations on branch operations or require subsidiarization where material gaps in the home state approach are seen. To date, the PRA has not required a branch to be subsidiarized.
- The PRA has enforcement powers over branches and can take remedial actions where firms fail to satisfy the Threshold Conditions.

### Limitations and practical challenges of the entity-neutral approach
- The entity-neutral approach (allowing branches and subsidiaries) is largely unique among jurisdictions hosting large financial centres and carries potential financial stability and reputational risks for the PRA.
- The PRA may require a branch or subsidiary to operate more standalone if it lacks sufficient information, cooperation, or adequate controls over U.K. activities; the relationship with the HSS and other host supervisors is critical.
- Specific limitations and challenges identified:
  - Governance and risk management requirements for branches are less detailed and prescriptive than those for U.K.-based legal entities; supervisory expectations are more detailed than in many jurisdictions but remain non-binding.
  - Formal prudential reporting for branches is more limited in scope (branch return and whole-firm liquidity reporting); ad hoc MI and HSS-provided information can be non-standard and harder to compare.
  - The PRA relies heavily on HSS cooperation; home and host authorities may have different perspectives and priorities, and may not always align on supervisory priorities or use the same supervisory tools.
  - Time and resource risk: focusing on group-wide risks could reduce depth of in-country branch-level assessment; group-wide recommendations may be directed to U.K. senior managers who may lack authority to effect group-wide remediation.
  - Level playing field concerns: U.K. banks and U.K. subsidiaries must comply with similar prudential requirements while branches do not; capital-related measures (e.g., increase of the Pillar 2 buffer) may have limited effect on branches.
  - The PRA has greater supervisory control over subsidiaries than branches (branches lack capital, liquidity and leverage requirements, Board minutes, etc.).

### Supervisory testing, stress testing, and FSAP recommendations
- CIB activities of foreign banks are not subject to any supervisory stress test in the United Kingdom.
- The 2016 FSAP recommended including CIB activities of international banks in supervisory stress tests; this recommendation has not been implemented because:
  - (i) these activities are included in firms’ ICAAP carried out at the level of U.K.-based subsidiaries, and
  - (ii) the PRA has access to results of stress tests conducted by HSS.
- The FSAP team continues to consider that including CIB activities in the scope of supervisory stress tests would be relevant given the importance of subsidiaries classified as DSIBs in the United Kingdom and to improve consistency of PRA buffer setting (currently based on the AST for some firms and on ICAAP for others).
- The FSAP team notes limitations of the PRA’s arguments: (i) firms operating in the United Kingdom face similar issues in conducting their own ICAAPs, and (ii) while the PRA may have access to detailed HSS stress-test results, the process is less mature for at least one important HSS and the PRA has no influence on scoping, scenario design, and main methodological aspects of those stress tests—unlike for its own exercises.
- Counterpoint: because international banks can operate as subsidiaries or branches and can transfer exposures across entities, a revision of the perimeter of supervisory stress tests (limited to subsidiaries) may have limited interest.

### Ongoing reassessment and implementation priorities
- It will be critical to regularly reevaluate whether the PRA’s entity-neutral supervisory approach delivers the expected supervisory outcome, particularly as:
  - the approach is being implemented in a changing environment with more firms operating as systemic branches;
  - cooperation with EU supervisors regarding U.K. branches of EU banks is relatively new.
- The PRA should continue to reassess its ability to:
  - contribute to and influence the supervisory strategy of foreign banking groups;
  - form a view on the risks those groups take and how they manage them;
  - reach agreement with HSS to take timely actions when concerns are identified.
- Continued assessment of consistency across UKDT and ARTIS firms is important; the frequency of deep dive C-SREP is lower for Category 1 ARTIS firms. ARTIS Category 1 firms have not been subject to credit AQR and have not been included in the data collection exercise on IFRS 9 during the COVID-19 crisis.

*International Monetary Fund — excerpt from content unit 1gbrea2022006*

### Box 3. Supervision of International Firms

### Box 3. Supervision of International Firms

### PRA approach to supervising international banks
- The PRA launched in January 2021 a consultation exercise (CP 2/21) setting out its proposed approach to supervising the U.K. activities of international banks. CP 2/21 largely consolidates and codifies the existing approach and expands on the PRA’s principles originally set out in SS1/18 applicable to branches.
- CP 2/21 links the size and systemic importance of firms together with the degree of integration between United Kingdom and foreign operations of the firm or group with the information and controls the PRA expects to see from firms and HSS.
- The PRA’s operational principle: the more visibility the PRA has on the risks of the wider group, and the better its controls, the more it is willing to let the firm operate in a highly integrated way; conversely, where information or cooperation are insufficient, the PRA will consider measures to require the U.K. operations to be more independent.1/

### Information expectations and SS5/21
- SS5/21 (published July 2021, following CP2/21) details PRA expectations of information from firms and overseas supervisors, including:
  - Baseline information from all firms.
  - Additional information for highly integrated subsidiaries and systemic wholesale branches.
- The PRA expects firms (branches and subsidiaries) to have a clear booking arrangement setting out what will be booked in each entity and how application will be verified.
- Firms from which the PRA expects the most information include:
  - The largest U.K. subsidiaries.
  - Systemic branches.
  - Groups designated as globally systemically important.
  - Firms most interconnected with the group’s overseas business.
- The PRA is taking steps to ensure rules and expectations for third country branches are more clearly set out in one place.

### Third-country branches, authorization, and systemic thresholds
- The PRA applies a consistent approach to third country branches, which now includes U.K. branches of EU banks.
- The PRA authorizes the firm as a whole (entire legal entity), and the firm as a whole must meet Threshold Conditions.
- The PRA assesses whether a wholesale branch is systemically important by reference to whether it exceeds an average of £15 billion total gross assets.
- If a branch is systemically important, the PRA expects increased cooperation with the HSS and may impose additional regulatory requirements if expectations are not met (examples given: restriction on business growth, deposit taking).
- In extreme cases, the PRA may require the firm to operate in the United Kingdom only as a subsidiary.
- PRA expectations for retail banking activities: generally does not accept that branches undertake deposit-taking from retail customers and small companies beyond de minimis levels.
- The PRA has introduced articulated expectations about risk management and governance of third country branches; these are expectations (not requirements) and could be more detailed in certain areas such as market risks.

### Non-Systemic Firms: supervisory intensity and resources
- Since the 2016 FSAP, intensity of supervision on non-systemic firms has slightly increased with focus on new and growing banks.
- PRA increased resources applied to non-systemic U.K. domestic firms (+6 percent over the past two years); number of supervised firms remained broadly the same on a net basis (100 in 2016, 102 in 2020).
- Extra specialist and analytical resources enabled more in-depth C-SREP and L-SREP reviews and more frequent credit quality assessments of small firms, particularly newer banks.
- The PRA has undertaken cross-firm thematic work, desk-based capital stress tests of smaller banks and building societies not subject to annual stress testing, and reviews of faster-growing firms’ capitalization and viability.
- Recommendation: The PRA should carefully weigh pros and cons before readjusting and lowering the frequency of certain supervisory tasks for smaller firms as envisaged in the PRA strategic review.

### Authorization, new banks, and mobilization
- The PRA and FCA jointly assess applicants under a MoU; FCA focuses on conduct, PRA on prudential considerations. Successful applicants must meet each regulator’s Threshold Conditions on an ongoing basis and be resolvable with minimal impact on the financial system.
- Since 2016, 20 new non-systemic U.K. banks have been authorized.
- The authorization process is flexible and permits a limited mobilization option for newly authorized banks for up to 12 months:
  - Mobilization permits building infrastructure during first 12 months with lower initial capital requirements and limits on deposit taking authority (i.e., a £50,000 deposit limit).
  - Full authorization requires all applicable conditions to be met.
- Since 2016, 15 applicants withdrew their authorization applications because they could not address concerns raised by the PRA and FCA.
- Since 2016, 12 non-systemic U.K. banks were wound down or sold.
- Supervision of new banks was enhanced with the PRA’s revised supervisory approach in 2021 (SS3/21). The PRA facilitates orderly solvent exit where necessary.

### Supervision of new and growing firms; PRA buffer for new banks
- Common weaknesses in new and growing banks: rapid growth, losses, reliance on regular capital injections, significant and rapid strategy/business-model changes, immature controls, higher likelihood of failure in early years.
- Supervisory Statement SS3/21 (April 2021) addresses expectations on:
  - Business model profitability and organic capital generation.
  - Good governance and conflicts of interest.
  - Sound risk management and controls, outsourcing, capital, and stress testing requirements.
- PRA expectations for new and growing subsidiaries of international groups are similar to U.K. headquartered firms but may be tailored; expectations on governance and board independence for significant regulated subsidiaries may exceed those for domestic banks.
- PRA requires realistic and deployable orderly exit plans and a simplified capital buffer for new banks:
  - The PRA buffer for new and growing banks is calibrated to allow time to find alternative capital or make business-model adjustments; the PRA believes six months is sufficient time.
  - Therefore banks are expected to have the PRA buffer equal to six months of projected operating expenses.
  - The PRA may, in exceptional circumstances, deviate from this buffer calculation if it creates a disproportionate level of capital relative to financial stability risks or where heightened risks are identified.
- Recommendation: The PRA should periodically reassess whether the revised capital buffer calculation framework for new and growing banks is effective.

### Methods of ongoing supervision — Governance and Risk Management
- Corporate governance and risk management systems are integral to supervision; Risk Management is central to the PRA’s risk framework.
- The SMCR complements board responsibility; regulatory requirements on variable remuneration reinforce individual accountability. The FCA’s “5 Conduct Questions Programme” and research on conduct and culture complement the remuneration regime.
- The PRA requires boards to have individual and collective knowledge, skills and experience; the SMCR is used to regularly review proposed board appointments.
- Governance reviews occur via onsite and desk-based reviews (governance and board effectiveness reviews) and continuous supervisory assessment; the PRA may commission S-166 Reviews for third-party governance/board effectiveness reviews.
- The PRA has challenged and taken action against firms for governance weaknesses; where risk management or governance is significantly weak, the PRA may set a risk management and governance (RMG) capital scalar as part of the PRA capital buffer.
- Second Line of Defense:
  - Assessment of risk management frameworks is presented and reviewed at annual PSMs (updated at midyear reviews).
  - For Category 1 firms, formal meetings with CROs at both Group and subsidiary level occur at least quarterly.
  - Non-systemic firms are assessed as part of the annual supervisory visit; Category 2 firms may face more frequent engagement.
  - C-SPEP and L-SREP reviews occur periodically (every year for Category 1 firms and every 2 or 3 years for the others) and may communicate firm-specific expectations.
  - Assessment of the second line of defense is included in most reviews.
- Emerging risk environment and complacency:
  - Low yield environment can encourage search for yield and potentially excessive risk taking.
  - Recent events (e.g., Archegos failure) showed failures to monitor and mitigate risks from complex CIB activities.
  - Private sector indicated rising risks from leveraged loans (reduced time for due diligence, higher debt to EBITDA, less stringent covenants).
  - The PRA has flagged these concerns internally, in risk dashboards, and publicly.
- Areas where further attention should be given to risk management:
  - PRA requirements and expectations on banks’ credit risk-management are quite general and not fully articulated; Pillar 2 Statement of Policy and supervisory statements set out approaches but are statements of policy (not binding).
  - For Category 2-5, assessment of risk management frameworks is conducted during annual visits mainly through interviews, which has limitations.
  - For Category 1 firms, the high number of meetings with senior management helps, but more could be done to further probe risk management processes.
  - The PRA could be more proactive in identifying risk management issues to be remediated: assessments can be limited, findings not always detailed, and some reviews do not include explicit recommendations on risk management processes and procedures.

*Box 3. Supervision of International Firms — extracted from the source content provided.*

### 63.      The U.K. financial regulators have focused increasingly on individual accountability.

### 63.      The U.K. financial regulators have focused increasingly on individual accountability.

### Senior Managers and Certification Regime (SMCR): design and objectives
- SMCR is a joint regime providing the PRA and FCA with supervisory tools to address both prudential and conduct of business risks.
- Main objective: reinforce a change in culture at all levels in firms through a clear identification of responsibilities to all individuals responsible for running key areas and activities.
- Intended effect: make it easier for both firms and U.K. financial regulators to hold individuals to account.
- Senior Management Functions (SMFs):
  - The most senior decision-makers who undertake one or more SMF must be assessed as fit and proper, have clearly defined responsibilities, and be subject to enhanced conduct requirements, including the duty to take reasonable steps in fulfilling their responsibilities.
  - Individuals seeking to hold SMFs must be approved by the PRA and/or the FCA.
- SMFs must have a clearly articulated Statement of Responsibilities outlining duties, including Prescribed Responsibilities that must be allocated across SMFs (e.g., responsibilities covering the adoption of the firm’s culture).
- Firms must produce Management Responsibilities Maps, consolidating information on management and governance arrangements.
- The PRA expects responsibility for a firm’s key risks and supervisory priorities (as identified by the PRA) to be allocated to a relevant SMF and reflected in their Statement of Responsibilities.

### Evaluation and impact of the SMCR
- The SMCR has improved individual accountability:
  - PRA evaluation in December 2020 concluded introduction of the SMCR helped ensure senior individuals in PRA-regulated firms take greater responsibility and made it easier to hold individuals to account.
  - SMCR and the remuneration regime forced firms to be more disciplined in mapping responsibilities and resulted in greater consistency and transparency on acceptable remuneration practices.
  - PRA supervisors are making more extensive use of the SMCR, evidenced by letters to regulated firms asking for a Senior Manager to be identified as responsible for addressing key risks identified.
  - A PRA CEO speech noted that success or failure in addressing key risks should be reflected in their remuneration.

### Areas needing further enhancement (findings)
- Supervisory letters sometimes did not link mitigation actions to responsible individuals.
- Data on adjustments to variable pay for material events does not point to an additive effect of the SMCR on remuneration practices; PRA notes room for improvement to better link the two approaches and ensure failures on major supervisory priorities have effective consequences on variable pay.
- Reputational and enforcement risk:
  - Regulators may incur reputational risk if an approved senior manager is involved in excessive risk-taking and/or severe misconduct.
  - Ongoing assessments of Senior Manager suitability are carried out through BAU supervisory interactions; ultimate responsibility for fitness and propriety sits with the firm.
  - The PRA gives a one-off approval which is typically not time limited.
  - Regulators may rely on softer powers before taking formal action (e.g., revoking approval), possibly creating a time lag if firms do not cooperate.
  - To date the PRA has not yet issued a formal rejection notice and has permitted certain applications to be withdrawn by firms.
  - Sanctions taken to date have not been based upon breaches of the SMCR framework; formal enforcement actions for individuals’ significant failures are an option but not the only response.

### Variable pay and remuneration framework
- Regulatory requirements on variable pay complement individual accountability and align incentives:
  - The PRA and FCA integrate supervision of remuneration arrangements within their supervisory approaches.
  - FCA focuses on key drivers of culture, including approach to rewarding and incentivizing staff.
  - PRA prioritizes firms with the potential to adversely impact the United Kingdom’s financial system.
  - Firms are required to adopt remuneration policies consistent with and promoting sound risk management, eliminate incentives towards excessive risk-taking, and align employee incentives with longer-term interests of firms, considering the timeframe over which financial risks crystallize.
- Material Risk-Takers (MRTs):
  - Senior individuals whose professional activities could have a material impact on the risk profile are known as MRTs.
  - Variable pay of MRTs is subject to qualitative and quantitative requirements, including payments in instruments other than cash, deferral of variable pay for a specified period depending on role and seniority, and application of downward adjustments after variable pay was granted.
- Evidence of accountability through variable pay adjustments:
  - In the period 2014–2018, firms reported nearly 400 material risk events that prompted them to adjust downwards the variable remuneration of a responsible individual.

### PRA review and supervisory practices on remuneration
- The PRA reviews, assesses, and challenges firms’ remuneration policies and practices on a yearly basis:
  - Category 1 firms must submit annually a Remuneration Policy Statement (RPS).
  - Supervision holds regular meetings with management responsible for remuneration matters and at least annually with the Chair of the Board Remuneration Committee.
  - Formal written feedback through a joint letter with the FCA is provided to all firms at the end of each year’s compensation cycle.
  - Where issues pose a significant risk to PRA objectives, supervisors can use firm visits and regular engagement meetings outside the annual discussion.
- FSB peer review findings and recommendations:
  - U.K. regulators have implemented compensation reforms consistent with FSB Principles and Implementation Standards for Sound Compensation Practices.
  - Suggested improvements include considering additional supervisory approaches for assessing effectiveness (additional thematic reviews and onsite activities such as sample testing and processes/systems walkthroughs).
  - Recommendation to consider whether a more structured approach to data collection, including a wider range of firms beyond Category 1, could be useful.

### Credit risk supervision: tools and current focus
- Credit risk supervision has assumed particular significance in the COVID-19 environment:
  - Assessing credit risk during the pandemic is challenging due to payment deferral schemes that might mask deterioration; government relief measures complicate assessment.
  - The PRA anticipates a rise in nonperforming exposures as support measures are progressively unwound.
- Supervisory methods:
  - Offsite surveillance and onsite review activities.
  - Offsite monitoring through regular data collection (e.g., retail secured LTVs and Commercial Real Estate LTVs, leverage lending) to identify outliers or evolving risk profiles.
  - Cross-firm and thematic reviews increasingly support supervision.
  - During COVID-19, PRA actions included targeted credit calls, additional credit reviews for most at-risk firms, regular thematic analysis of firms’ management information, and thematic reviews on retail payment holidays, potential fraud, and credit risk in BBLS portfolios.

### Asset Quality Reviews (AQR): coverage, benefits, and limitations
- AQR program started in 2018 to assess banks’ credit risk management and overall credit risk; paused in 2020 and expected to restart in 2021.
- AQR features:
  - Can be firm-specific or thematic across two or more firms; cover retail and wholesale activities; focus on portfolios or elements of credit risk management controls and processes.
  - Should include review of provision cover relative to asset quality and peer benchmarking.
  - Credit coverage requirements for assets in scope over a three-year period are between 40 and 60 percent for Category1 firms.
  - Credit reviews conducted every three years for material portfolios in individual non-systemic firms.
- Limitations and areas for improvement:
  - Category 1 ARTIS firms have not been subject to credit AQRs; ARTIS firms’ most complex activities (e.g., project finance) often excluded from scope.
  - Certain higher risk areas (e.g., leveraged lending and CLO warehousing) received supervisory attention but were not included in credit AQRs.
  - For non-systemic firms, AQRs have mainly relied on desk-based analysis with limited detailed transaction testing.
  - Since 2018 the PRA has conducted around 445 credit reviews, but only 19 AQRs included credit file reviews before suspension in March 2020.
  - The PRA generally would not conduct detailed file reviews within retail credit portfolios; when sample file reviews occur, sample sizes are usually low (10 to 15 files) but targeted.
  - Feedback is provided when provisions look low relative to peers, but banks are not formally requested to make loan reclassifications and/or adjust provisioning.
  - PRA might consider applying a Pillar 2 surcharge if provisions judged insufficient, but this would not be an immediate response.
  - Full AQR reports with all detailed findings are not shared with firms; main findings are included in annual PSM letters.

### IFRS 9 expected credit loss (ECL) implementation and PRA actions
- PRA regards effective implementation of IFRS 9 ECL as important for safety and soundness of PRA-authorized firms, noting it is not the PRA’s role to set or enforce accounting standards but it has interest in their implementation when impacting statutory objectives.
- PRA approaches:
  - Regular dialogue with Category 1 firms on provisioning using tools such as AQRs (focusing on assets in Stage 3), thematic and data-analysis work, bilateral meetings with external auditors, and Written Auditor Reporting (WAR).
  - WAR has focused on criteria for Significant Increase in Credit Risk (SICR), economic scenarios and probability weightings, models, and data limitations.
  - PRA used auditors’ responses to identify high quality practices and encouraged adoption via “Dear CFO” letters.
  - UKDT undertook in January 2019 a one-off exercise comparing IFRS 9 provisions across Category 1 firms and asset classes (e.g., CRE, SME, Large Corporates).
  - In context of COVID-19, PRA collected specific IFRS 9 data covering firms’ scenarios and ECLs for Category 1 UKDT firms and selected smaller firms since Q2 2020, scheduled to continue through 2021; Category 1 ARTIS firms were not included in the scope of work.
  - No deep dives on ECL models have been conducted by the PRA.
- Non-systemic firm approach:
  - Greater emphasis on identification of outliers through desk-based analysis and peer benchmarking.
  - A credit monitoring tool benchmarks firms’ provisions by asset type to identify outliers.
  - UKDT undertook in October 2019 a thematic review of IFRS 9 provision cover relative to risk ranking and asset quality for retail portfolios of twenty Category 2-4 firms.
    - Findings: seven firms identified as outliers with retail portfolio provisions looking low relative to asset quality and peer benchmarking; around 10 firms exhibited lack of sensitivity to risk in models; significant differences observed in model responsiveness to changes in PD time horizon and economic scenario weightings.
    - Thematic work led to detailed generic feedback to all firms and specific feedback to those with concerns.

*Source: Excerpt from IMF chapter "63.      The U.K. financial regulators have focused increasingly on individual accountability."*

### 71.      More  work is needed to ensure the adequacy of ECL allowances and the accuracy of

### More work is needed to ensure the adequacy of ECL allowances and the accuracy of methodologies

### Expected improvements to ECL provisioning and methodology
- IFRS 9 is a relatively new framework that has been tested during COVID-19 and the quantification of ECLs faced serious challenges during the pandemic (unprecedented level of uncertainty, difficulty with measuring the impact of support measures, etc.).
- The pragmatic approach taken by the PRA during the pandemic relied significantly on benchmarking and peer review analysis and on extensive engagement with auditors and firms and was appropriate as a first step.
- Findings from PRA analysis:
  - A wide range of approaches across UKDT firms was revealed, with significant differences in terms of management overlays.
  - Given that IFRS 9 is principle-based and involves judgment, prior analyses have not always been conclusive.
- Recommendations and planned actions:
  - The PRA should strengthen the approach to ECL provisioning coverage for all firms, including ARTIS firms, by conducting thorough in-depth reviews (deep dives) of models, methodologies, and inputs used to quantify ECL estimates.
  - Benchmarking could be more granular (i.e., comparison of probability of default (PD) and loss-given default (LGD) data by sector, by geographies, etc.).
  - The PRA may consider pursuing and expanding (to ARTIS firms) the data collection exercise covering firms’ scenarios and ECLs that was launched during the COVID-19 crisis.
  - The PRA should review Stage 3 assets more extensively during AQRs.
- Retail and corporate asset approaches:
  - The PRA has commenced work to develop an approach to more formally assess provision adequacy for retail assets—assessing overall provisions in aggregate and comparative provision levels across banks to highlight outliers.
  - Once finalized for retail assets, the PRA’s objective is to follow with an approach for assessing corporate assets, which may be more challenging because corporate assets are less homogenous.
  - Completing the corporate asset approach is critical: benchmarking to identify outliers is not equivalent to assessing the appropriateness of ECL allowances.

*Source: 1gbrea2022006 - 71.      More  work is needed to ensure the adequacy of ECL allowances and the accuracy of methodologies.*

### Supervision of concentration risk

### Framework and supervisory practice
- Concentration risk is addressed under the Pillar 2 framework.
- Firms are required to articulate their risk-appetite, risk profile, and capital and liquidity strength in their ICAAP reviews, which must be conducted at least annually.
- Firms are expected to set limits on single name, geographic and sectoral risk concentrations as part of their ICAAP (this expectation is not explicitly mentioned in the Supervisory Statement on the ICAAP and SREP (31/15)).
- The PRA reviews firms’ ICAAPs within the SREP.
- BoE staff regularly monitor growth rates in bank exposures to a range of sectors, reviewing whether any banks are particularly exposed to such sectors.
- Choice of stress scenarios in the FPC’s annual stress test exercise targets potential areas of vulnerability to major U.K. banks.

### PRA stance on limits and mitigation
- The PRA does not set limits for credit concentration risk (except limits on single counterparties or groups under the large exposures regime).
- The PRA reviews banks’ risk concentrations in a judgement-based way and may require mitigation of potential negative outcomes but does not necessarily expect firms to change portfolio composition where concentration risk reflects business model strategy.
- The PRA requires firms to mitigate concentration risks through additional capital add-ons under Pillar 2A as part of the SREP to reflect sectoral and geographic concentration risk and risks arising from lack of granularity of lending portfolios.

### Credit risk models for regulatory purposes (IRB/IMM)

### Permissions, coverage, and trends
- 20 banks have been given permission to use internal ratings-based (IRB) approaches.
- For counterparty credit risk, 10 banks are authorized to use the internal model method (IMM).
- Since 2016 the PRA has granted new IRB permissions to two banks and is currently considering four additional new IRB permissions.
- A noticeable trend: smaller banks have applied or are considering applying for IRB permission for more favorable capital treatment.

### PRA model assessment process and gaps
- The PRA relies on dedicated units within SRS (Credit Risk Measurement Team (CRMT) in SRS Credit Division and a team within the Traded Risk division).
- Initial permission reviews are thorough, but the PRA does not validate model input data, review IT systems and processes, and does not test model implementation.
  - Going forward, supervision should play a more active role to ensure firms comply with use test requirements, especially for new firms that may struggle with data quality and implementation.
- Ongoing monitoring:
  - The PRA assesses performance of approved models after permission and reviews material model changes.
  - CRMT has carried out thematic work since 2016 (review of mid corporate PD models, review of wholesale LGD model, impact of COVID-19 on IRB models).
  - The PRA is reviewing banks’ adoption of the EBA Roadmap to repair IRB models—this thematic review is expected to identify outliers and good implementation practices.
- Model changes and resource constraints:
  - PRA conducts bank-specific reviews triggered by model changes; the breadth and depth of reviews depend on nature, materiality, impact, and CRMT resource availability, which are somewhat stretched.
  - Banks reported long delays in processing model change applications.

### Regulatory outcomes and remediation
- Regulatory adjustments and guidance:
  - Concerns about differences in risk weights for mortgages and the trend of decreasing risk weights led to a multi-year project and a Supervisory Statement setting PRA expectations for mortgage IRB models, including the need for all banks to move to a hybrid calibration approach for mortgages.
  - The PRA has implemented standards and guidelines as part of the 2016 EBA roadmap to repair IRB models (including on materiality thresholds, days past due, PD/LGD estimation, downturn LGD).
  - Implementation of hybrid PD models is limited to mortgages; SRPC decided in 2019 that firms may continue using PIT approaches for unsecured retail exposures.
  - No guidelines on recalibration of IRB models in the context of COVID-19 have been set out by the PRA.
- Enforcement and impact:
  - Following IRB model reviews, firms are expected to set credible and timely plans for return to full compliance; action taken by banks is discussed during Continuous Assessment meetings.
  - The PRA has applied tougher actions in some instances: model level floors, model level RWA add-ons, portfolio level add-ons, and removal of IRB permissions (including for very large banks).
  - Post-model adjustments imposed on firms have resulted in a significant increase in RWAs (11 percent).
  - Banks’ remediation efforts are not tracked centrally; follow-up is performed by each model reviewer individually.

### Need for proactive, systematic review coverage
- Historical approach has been largely reactive (initial permissions granted before 2016); moving to a more proactive review approach across the full range of credit models is a main challenge.
- Some proactive work has been done, but mainly ad hoc. CRMT is reviewing recalibrated mortgage models following PRA clarification on hybrid calibration.
- The PRA envisages a more structured proactive review approach, but resource constraints make wide implementation unlikely before 2023 (until end 2022 the review agenda will be driven by banks’ submissions: Hybrid Mortgages and IRB Roadmap submissions).
- Expanding the calibration work done on residential mortgages to a wider range of portfolios and models (including IMM) would increase confidence that capital reductions are balanced with accurate models using robust methodologies; this would require increased resources.

### Market risk supervision

### Framework and current practice
- The regulatory framework for market risk is comprehensive: the United Kingdom’s Capital Requirements Regulation and the PRA rulebook set binding requirements. The PRA’s approach is set out in Supervisory Statement SS13/13.
- The BCBS January 2019 revision to the market risk framework has not yet been implemented.
- Market risk is significant for banks with large CIB activities that usually use internal models to calculate trading book capital charges.
- The PRA applies overlays to address risks not captured in internal models:
  - Risks-not-in-VaR (RNIV) framework under Pillar 1 and Pillar 2A illiquid, one-way, and concentrated risks assessment.
  - The total RNIV add-ons increased overall requirements by 40 percent (as of December 31, 2020).
  - Pillar 2A assessments can be sizeable for firms’ exotic derivatives portfolios.

### Supervisory emphasis and review mechanisms
- Strong emphasis on market risks with clear focus on Category 1 firms; supervisory teams and SRS rely on skilled resources.
- PRA conducts Continuous Assessment meetings with all Category 1 firms to form a cross-market view of risks and emerging themes.
- Banks provide detailed information (VaR exposures, market risk sensitivities, counterparty risk measures such as current exposure and potential future exposure (PFE), etc.), though U.K. branches of non-U.K. banks do not have to supply this information on a routine basis.
- Deep-dive SREP reviews are periodic: annually for Category 1 UKDT banks, at least every 3 years for Category 1 ARTIS banks; these assess whether minimum capital requirements materially cover market risks using firm-specific measures and cross-firm benchmarks.
- Market risk models are assessed through periodic thematic reviews and firm-specific reviews; all material VaR models (FX VaR, interest rate VaR, equity VaR, credit VaR) have been reviewed in the last 5 years and IRC models have been reviewed twice.
- Issues identified in model reviews frequently lead to additional RNIV requirements while firms introduce corrective measures.

### Areas for supervisory improvement
- Thematic reviews are valuable but sometimes need follow-up firm-specific reviews with clear recommendations and prescribed timelines when progress is insufficient.
- P&L developments in PSM packs are sometimes brief; evidence of effective use of onsite firm-specific reviews (e.g., front-to-back reviews) is limited.
- Supervising market activities conducted by branches has limitations:
  - Supervisory tools for branches are narrower than for subsidiaries.
  - PRA expectations for third country branches to supplement HSS requirements are less detailed than for U.K.-based entities (for example, no expectations for management of market risk).
  - Information collected on branches may be less granular (no required regulatory return, more limited MI on a routine basis).
  - When transactions are booked in a U.K. entity, that entity needs robust and effective controls in the United Kingdom, but it can be unclear which legal entity in the group is taking and managing the risk, necessitating close cooperation between the PRA and HSS—this is less relevant on a going concern basis but matters if difficulties arise.

*Source: 1gbrea2022006 - 71.      More  work is needed to ensure the adequacy of ECL allowances and the accuracy of methodologies.*

### 79.      When certain regulatory requirements were  eased temporarily during the COVID-19

### 1gbrea2022006 - 79.      When certain regulatory requirements were  eased temporarily during the COVID-19

### Regulatory forbearance and market risk (VaR back-testing exceptions)
- To address excessive pro-cyclicality in market risk capital requirements at the onset of the COVID market stress in March 2020, firms were temporarily allowed until September 2020 to neutralize the impact of back-testing exceptions when calculating risk-based capital requirements based on VaR models.
- This temporary approach was withdrawn in October 2020 and firms have been required since then to formally apply for exceptions to be discounted (only those exceptions approved by the PRA can be deducted from the calculation of the VaR multiplier).
- SRS reviewed in Q4 2020 the rationale for why each exception should be discounted to ensure exceptions do not result from model weaknesses (e.g., due to missing risk factors).
- In some cases, firms were not able to provide sufficient evidence that exceptions were not due to model weaknesses, and consequently not all applications to discount exceptions have been approved.
- Checks were not conducted before October 2020 when the temporary approach was used.
- Footnote context: When the number of back-testing exceptions is high (i.e., the loss incurred on a single day is greater than the loss indicated by the model), a penalty is usually applied by banking regulators in the form of a multiplier. Several regulators (ECB, OSFI, FINMA) have introduced exemptions concerning the number of back-testing exceptions taken into consideration. In the United Kingdom this was done by offsetting capital increases due to higher VaR multipliers with commensurate reductions in risks-not-in-VaR (RNIV) requirements. Supervisors must understand reasons behind a large number of back-testing exceptions and ensure model performance remains satisfactory.

### Liquidity Risk — requirements, monitoring, and supervisory approach
- The PRA assesses firms against prescribed liquidity requirements reflecting their liquidity risk profile using a range of tools.
- Firms are required to have robust strategies, policies, processes and systems for identification, measurement, management, and monitoring of liquidity risk over appropriate time horizons, including intraday, and to maintain adequate levels of liquidity buffers. The Internal Liquidity Adequacy Assessment Process (ILAAP) is the initial basis for assessing a firm’s liquidity resources.
- The PRA, through the supervisory review and evaluation process (L-SREP), determines an appropriate liquidity risk profile and level of liquidity resources for that firm, and identifies improvements to qualitative arrangements for managing liquidity.
- The Liquidity Coverage Ratio (LCR) calculated as the percentage of High-Quality Liquid Assets/Stressed net outflows over 30 days is the key measure of liquidity risk. The PRA is in the process of adopting the longer time horizon Net Stable Funding Ratio rule (NSFR).
- The PRA collects LCR data through month-end LCR reporting, proxy LCR produced by the PRA110 liquidity reporting template, and MI received from firms. The frequency of data receipt may depend on the size of the firm.
- Firms are encouraged to use HQLA buffers in a stress environment. Buffers generally were not breached during the COVID-19 period because of BoE and government support measures.
- If a firm falls or expects to below 100 percent of LCR, it is expected to inform the PRA and submit a restoration plan.
- The PRA introduced in 2019 a liquidity dashboard for reviewing and interrogating liquidity metrics on a single and cross-firm basis; it served as a valuable tool during the COVID-19 period.
- Under PRA110, firms are required to report on a weekly basis, unless there is a specific liquidity stress or market liquidity stress, in which case the PRA110 will be reported every business day.
- Supervisors monitor banks’ internal liquidity metrics such as survival days and low points under internal stress tests against their board’s liquidity risk appetites, which firms are required to produce under the PRA’s Overall Liquidity Adequacy Rule (OLAR).
- To inform its analysis, the PRA generally uses surplus above 100 percent of LCR, firms’ internal LCR targets and risk limits as benchmarks.

### Liquidity supervision proportionality and review cadence
- The PRA uses a proportionate approach to reviewing liquidity at large and smaller firms:
  - Category 1 firms are subject to an annual L-SREP that includes a supervisory-led assessment of the firm’s ILAAP and an SRS-led reassessment of the Pillar 2 liquidity guidance. A deep-dive L-SREP assessment is conducted every third year.
  - Category 2 medium sized firms are subject to an L-SREP at least every two years.
  - Category 3 and 4 firms undergo an L-SREP once every three years.
  - International firms are subject to L-SREP reviews at least every three years on a proportionality basis.
- The L-SREP also examines ALM and treasury risk management. Liquidity is considered as a firm risk element during the PSM process.
- The PRA conducts qualitative risk management reviews: e.g., a 2019 horizontal thematic review of liquidity and capital risk management at the largest U.K. firms focused on Management Information, risk appetite and three lines of defense and found MI of high quality at most firms but weaknesses in application of risk appetites and inconsistencies in lines of defense implementation.
- In 2019, SRS carried out liquidity reviews of EU GSIBs applying for third country branch authorizations focusing on risk management practices, governance, and controls at branch and entity levels.

### Interest Rate Risk in the Banking Book (IRRBB) — expectations and measurement
- The PRA has effectively communicated expectations for IRRBB to large and small firms and published a comprehensive set of requirements and supervisory expectations for firms to monitor and manage IRBB risks.
- Firms are required or expected to identify, measure, evaluate, monitor, report and control or mitigate interest rate risk in the banking book on a timely basis.
- Several standards have been modified to consolidate requirements and expectations, include substantive elements of the EBA guidelines on the management of IRRBB and introduce the new BCBS standardized framework for measuring economic value of equity relating to IRRBB.
- The PRA uses economic value and earnings-based measures to monitor firms’ IRRBB:
  - For larger firms, the PRA assesses gap risk, basis risk (including swap spread risk), risks from embedded optionality and changes in assumptions.
  - For smaller firms, the PRA assesses gap risk and basis risk.
- All firms submit the regulatory gap report (FSA017), which provide data on the impact of parallel shock to the yield curve on banks’ economic value measures.
- For larger firms, the PRA also collects structured data through “Non-traded Market Risk” returns in addition to FSA017 that provides comparable and consistent repricing gaps based on parallel shock scenarios and basis risk information by material currencies. These returns form the basis of quarterly supervisory risk reports produced by IRRBB specialists.
- For the outlier test assessment on larger firms, the PRA reproduces the gap report against the six supervisory shock scenarios based on the firms’ “Non-traded Market Risk” returns.
- For smaller firms, the PRA collects voluntary returns that capture basis risk exposures in addition to FSA017. While technically voluntary, in practice all category 2-5 firms submit them every quarter.
- FSA017 is used for assessing gap risk, and the PRA reproduces the gap report across the six supervisory shock scenarios for the outlier tests assessment based on smaller firms’ FSA017 returns. The PRA uses the basis risk exposures returns to monitor a gross basis mismatch measure across the small firms’ population.

### IRRBB reporting, monitoring, and supervisory review
- The PRA obtains and monitors firm management information reports on IRRBB risk measures, limits, and controls:
  - For larger firms, the PRA receives internal management information relating to IRRBB in line with firms’ internal reporting timetable and at least quarterly. These include IRRBB exposures and limits based on firms’ internal calculations. Supervisors review these submissions regularly.
  - IRRBB risk exposures at larger firms are subject to a comprehensive risk assessment process involving collection and processing of granular risk data, firm meetings and discussion. Larger firms are also subjected to stress-testing on exposures to IRRBB as part of the annual stress-tests conducted by the BoE.
  - For smaller firms, the PRA uses FSA017 returns where firms calculate and report the impact on their economic value measures from a parallel shock to the yield curve as a percentage of capital. Smaller firms must inform the PRA of breaches to the supervisory outlier test. Smaller firms’ IRRBB risk limits and controls are not routinely reported but are assessed regularly as part of the L-SREP process.
- The PRA reviews firms’ policies and processes to determine an appropriate and properly controlled interest rate risk environment:
  - For Category 1 firms, offsite assessments occur quarterly with a more comprehensive annual review that includes an assessment of a firm’s Pillar 2A capital requirement for IRRBB. The frequency of onsite visits for larger firms is determined using a risk-based approach informed by quarterly IRRBB monitoring and regular engagement with firms.
  - For non-systemic firms, risk management of IRRBB is assessed onsite as part of the L-SREP cycle (at least every 2 years for Category 2 firms and every 3 years for the smaller firms). Pillar 2A capital is set based on the C-SREP cycle, which runs the same periodicity but in non-L-SREP years. This means Category 2 firms receive some level of IRRBB assessment every year and for the smaller firms, 2 out of every 3 years.
- Footnotes: Firms are expected to do their best effort to comply with the PRA’s implementation of the EBA “Guidelines on the management of interest rate risk arising from non-trading book activities” (EBA/GL/2018/02). Revisions to the PRA Rulebook and supervisory statements (SS31/15 and SS20/15) will apply from December 31, 2021.

### Operational Risk — framework, supervision, and operational resilience policy
- The PRA’s operational risk management framework and capital expectations are clearly articulated. The U.K. CRR sets out binding requirements for firms relating to the calculation of capital charges for operational risk.
- The PRA requires operational risk-management frameworks commensurate with a firm’s scale, nature, and complexity. ICAAP part of the PRA rulebook sets out requirements for firms’ methodologies for managing operational risk. Supervisory expectations are detailed in SS31/15 and in a Statement of Policy on the PRA's methodologies for setting Pillar 2 capital including for operational risk.
- The PRA and the FCA consider the extent to which firms have reduced the likelihood of operational incidents; can limit losses in the event of severe business disruption; and whether they hold sufficient capital to mitigate the impact when operational risks crystallize. The new policy on operational resilience will complement those requirements.
- All firms are subject to offsite operational risk assessments under the Continuous Assessment process, which may occur quarterly or annually. Systemic firms’ operational risk frameworks are reviewed once every 3 years.
- Where necessary, the PRA requires firms to address identified deficiencies in their operational risk management framework and may increase firms’ capital requirements where operational risk model inputs are not fit for purpose, loss data are of poor quality or incorrectly categorized or the operational risk capital model is not fit for purpose.

### Operational resilience developments and supervisory focus (COVID-19 lessons)
- The COVID-19 pandemic underscored the importance of operational risk frameworks and renewed attention on business resumption and contingency planning.
- In 2020, the PRA conducted a thematic review of 12 firms’ business continuity planning arrangements, including high and low impact firms. Findings and feedback were provided to firms. For most firms, identified weaknesses included:
  - a lack of scenario testing for data loss and customer channels interoperability;
  - gaps in IT disaster recovery (ITDR) testing; and
  - independent challenge and monitoring weakness for most firms.
- In 2020/2021, the PRA assessed the impact of COVID-19 on firms’ continuity plans for critical functions and services throughout the pandemic, focusing on:
  - how the highest impact firms identified and mitigated key medium-term risks to critical functions and service continuity arising from COVID-19 and related disruptions to people, processes, and technology;
  - robustness of operating models and business continuity plans;
  - risk posed by material dependencies on external outsourcing;
  - impact of any service continuity issues as a result of the crisis; and
  - weaknesses primarily in staff location, work from home capability, communications and geographical concentrations.
- The PRA has increasingly emphasized the importance of operational resilience and fostered international supervisory cooperation (e.g., December 2020 joint statement with the ECB and the Federal Reserve Board on operational resilience).
- In March 2021 the PRA issued a Policy Statement on Operational resilience: Impact tolerances for important business services (PS6/21), which applies to most firms. The new policy will place additional requirements on firms to limit the operational impact of disruptions by continuing to provide their important business services.
- Implementation focus: the PRA will consider business continuity policy alongside operational resilience policy, focusing on whether:
  - (i) banks’ recovery priorities for their operations prioritize delivery of important business services within impact tolerances;
  - (ii) allocation of resources and communications planning for business continuity planning focuses on delivery of important business services; and
  - (iii) business continuity plan tests are integrated with testing of disruption scenarios and relate to impact tolerances.

### Outsourcing and third-party risk management
- The PRA monitors significant or material outsourcing and will collect standardized data on third party dependencies and third-party audit reports of firms’ material outsourcing arrangements.
- The PRA and FCA adhere to the EBA’s guidelines on outsourcing. The PRA issued in late 2019 a consultation paper on “Outsourcing and third-party risk management” (CP30/19) intended to complement operational resilience proposals (CP29/19), clarify PRA expectations on EBA guidelines in context of its own requirements, and elaborate expectations (e.g., data security, business continuity and exit plans). The final policy was published in March 2021 (SS2/21). The FCA has published its own guidance on outsourcing.
- Firms using outsourced and other third-party service providers remain responsible for managing associated risks. Greater levels of risk management are expected from firms heavily dependent on outsourcing and third-party service providers.
- Firms are required to notify the PRA when “entering into, or significantly changing, a material outsourcing arrangement” for the purpose of monitoring firms’ most important outsourcing arrangements with service providers involved. The PRA does not currently maintain a central repository of these notifications.
- The policy on outsourcing and third-party risk management will:
  - standardize the information that firms file in these notifications and create an online portal that will pool the information provided by firms to identify concentrations in firms’ third-party dependencies;
  - require firms to require outsourcing firms to give the PRA access to third party audit reports and certifications relevant to firms’ material outsourcing arrangements.
- Currently, audit reports can be requested in the context of individual supervisory inspections of specific firms or thematic reviews, but the PRA does not currently collect them systematically.
- The PRA assesses firms’ approaches to outsourcing across: strategy and rationale for outsourcing; level of inherent risks (e.g., concentration risk, lack of contingency); level of governance and oversight; level of understanding and mitigation of third party risks; and the suitability, frequency and rigor of the firm’s monitoring and testing of third party resilience (e.g., Exit testing).
- Outsourcing has been made a Prescribed Responsibility in the SMCR. Once PRA policy on outsourcing third-party risk management is in force, the PRA will assess firms against this policy.

*Source: 1gbrea2022006 - 79. When certain regulatory requirements were eased temporarily during the COVID-19 (IMF country report content).*

### 90.      Cloud outsourcing presents a need for heightened supervisory attention and

### 1gbrea2022006 - 90.      Cloud outsourcing presents a need for heightened supervisory attention and

### Cloud outsourcing: risks, supervisory access, and resourcing
- Cloud outsourcing presents a need for heightened supervisory attention and technological understanding.
- The PRA and FCA align to the EBA’s Guidelines on Outsourcing Arrangements but have developed them further and integrated them into their broader approach to operational resilience.
- The PRA reviews several material cloud outsourcing notifications from firms and monitors developments across the industry and with cloud providers, and reviews firms’ oversight of multi-year transformation and digitization programs to enhance understanding of idiosyncratic and collective risks.
- The PRA does not have express statutory authority to directly review or examine any critical services that cloud, and other third party service providers provide to regulated firms, unless the firms’ contracts with these providers authorize such regulatory access.
- The PRA and FCA require firms to include clauses granting regulatory access in their contracts with cloud providers and other “material” third party service providers.
- Banks’ increasing use of the cloud to perform core services presents heightened operational and potentially systemic risks given:
  - the relatively small number of providers;
  - the current lack of substitutability of the providers and many of their services.
- Recommended supervisory and policy actions:
  - The BoE/PRA and FCA should seek legislation authorizing their direct supervisory access to cloud firms or mandate that firms insert comparable regulatory access terms in their contracts with cloud providers.
  - The PRA and FCA should hire or develop additional staff with the appropriate technological skills to understand and assess the risks of cloud outsourcing and individual firms’ mitigation strategies.
  - Alternatively, the PRA and FCA should utilize statutory powers under Section 166 of FSMA authorities to engage Skilled Person Reviews to fill any existing staffing and skills gaps.
  - Effective mitigation will require cross-sectoral and cross-border regulation and cooperation.
  - Bank, PRA and FCA, working with HMT, are planning additional measures to manage risks stemming from Critical Third Parties, including: a framework to designate critical certain third-party service providers; resilience standards; and resilience testing.

### Capital adequacy framework: structure and U.K. specifics
- Capital adequacy requirements are broadly aligned with BCBS standards. The United Kingdom’s Capital Requirements Regulation (U.K. legislation) and the PRA rulebook set binding regulation.
- Notable U.K. deviations and decisions:
  - The PRA has decided it will not follow the prudential treatment of software assets introduced by the EBA in October 2020, meaning banks will continue to be required to fully deduct all intangible assets from regulatory CET1 capital.
  - The onshored U.K. CRR allows the splitting of residential mortgage loans into lending qualifying for a 35% risk weight and lending not qualifying for this preferential treatment, which is not envisaged under the Basel framework for the standardized approach for credit risk.
  - The U.K. CRR allows for lower risk weights to be applied to non-defaulted small and medium-sized enterprises (SME) exposures, which does not comply with the Basel framework.
- Leverage ratio framework specifics:
  - Firms with retail deposits equal to or greater than £50 billion must satisfy a minimum Tier 1 leverage ratio of 3.25 percent on a measure of exposures that excludes qualifying central bank reserves.
  - The leverage ratio framework includes regulatory buffers that must be met only with CET1: an additional leverage ratio buffer for systemically important banks and a countercyclical leverage ratio buffer.
  - Proposed changes to the leverage ratio framework were made by the FPC and PRA in June 2021.

### Pillar 2, ICAAP, SREP, and PRA buffer calibration
- Pillar 2 overview:
  - Pillar 2 capital requirements are imposed on all PRA-regulated banks, building societies, designated investment firms and all PRA-approved or PRA-designated holding companies to reflect risks not captured or not fully captured under Pillar 1 (Pillar 2A capital), and risks under stress (Pillar 2B capital or PRA buffer).
  - Firms must carry out an ICAAP to assess on an ongoing basis the amounts, types, and distribution of capital considered adequate to cover risks; capital resources and capital requirements should be projected over a three-to-five-year horizon.
  - The PRA assesses firms’ ICAAP as part of the SREP to determine whether material risks have been identified and whether amount and quality of capital identified by the firm is sufficient.
  - SREP were put on hold during the COVID-19 crisis and a return to a normal supervisory cycle was expected for 2021 or 2022.
- Setting of Pillar 2A and Pillar 2B:
  - The PRA sets Pillar 2A capital requirements in light of both the calculations included in a firm’s ICAAP and the results of the PRA’s own Pillar 2A methodologies.
  - Detailed methodologies inform the setting of a firm’s Pillar 2A capital requirement through the ICAAP and SREP process.
  - Peer group reviews are used to ensure consistency of Pillar 2A decisions across firms.
  - SME lending included in the retail portfolio (as defined in the CRR) and sovereign exposures are excluded from the calculation of the sector concentration risk measure.
  - Residential mortgage portfolios on the standardized approach are not taken into account for the calculation of geographic concentration risk measure.
  - Following the SREP, the PRA notifies each firm of an amount of capital it should hold as a PRA buffer (Pillar 2B capital), in addition to total capital requirements and combined buffers, to absorb losses under a severe stress scenario (as estimated under either the BoE Annual Stress Test (AST) for Category 1 firms, or own stress tests as part of the ICAAP for Category 2-5 firms).
  - Where the PRA assesses a firm’s risk-management and governance to be significantly weak, it may set the PRA buffer to cover risks posed by those weaknesses until they are addressed.
  - The component of the PRA buffer that relates to the impact of the stress is calculated as the excess amount of capital required above the CCB and CCyB to withstand a severe but plausible stress.

### PRA buffer setting, consistency, and stress testing
- Frequency and calibration:
  - The frequency of calibration of the PRA buffer is aligned to a firm’s ICAAP/SREP cycle: annually for major U.K. firms, and every two to three years for other firms.
  - Deep dives SREPs are conducted annually for UKDT Category 1 firms but only every three years for ARTIS Category firms.
- Use of the Annual Stress Test (AST):
  - For major U.K. firms, the AST supplements the SREP and helps set the PRA buffer in a more consistent manner as the same scenarios are used for all Category 1 firms.
  - The scenario used in the AST is published to all firms and serves as a template and severity benchmark to help non-AST firms develop and calibrate their own internal scenarios.
  - The use of AST scenarios is not mandatory. A project to introduce “enhanced ICAAP” that would require Category 2 firms to use the AST scenarios and comply with data requirements was put on hold in 2020 because of the COVID-19 crisis.
  - The PRA envisages that it will be important to enhance consistency by mandating some firms to use standardized scenarios and could continue undertaking desk-based stress tests to identify outliers.
- Assessment practice:
  - The PRA conducts in-depth reviews and regularly challenges firms on their ICAAP.
  - Supervisors can cross-refer to loss rates and other parameters of similar portfolios derived from the AST to assess firms’ stress-testing outputs and calibrate Pillar 2B buffer requirements.

### Adjustments for non-systemic and new/growing banks
- Adjustments introduced:
  - Supervisors can exercise judgement for small firms where the credit concentration risk methodology could overstate risks (since 2015).
  - Since December 2017, supervisors can exercise judgement to adjust variable Pillar 2A add-ons for firms using the standardized approach for credit risk.
  - To date, 25 firms have benefited from a reduction to their Pillar 2A add‑ons, with an average adjustment of 1.44% of risk‑weighted assets.
- New and growing banks:
  - The PRA introduced specific expectations for capital management in new and growing banks, including simplification of the PRA methodology for calibrating the PRA buffer for these banks.
  - The P2B buffer for new banks is not calibrated on the basis of a stress test; instead the PRA buffer is calibrated to allow banks time to find alternative sources of capital or make business model adjustments in the event of a loss of investor support and is equal to projected operating expenses projected over a six-month horizon.

### Policy shifts, trade-offs, and monitoring
- Key policy changes and timeline:
  - In December 2019, the FPC increased the CCyB rate in a standard risk environment from 1 percent to 2 percent.
  - The PRA indicated it would consult on a proposal to allow firms to offset the 1 percentage point increase in the CCyB by an equivalent reduction in Pillar 2A add-ons, subject to conditions and supervisory judgement (a one percent floor applies to P2A add-on).
  - In March 2020, the FPC reduced the CCyB rate to 0 percent to sustain lending to the real economy.
  - Following consultation, in July 2020 the PRA implemented a reduction to Pillar 2A capital requirements as initially proposed while increasing temporarily the PRA buffer for all firms that receive a P2A reduction until the CCyB rate increases towards 2 percent.
  - The FPC expects to maintain the 0 percent rate for at least 12 months; any subsequent increase would not be expected to take effect until March 2022 at the earliest.
- Trade-offs and risks:
  - Shifting the balance of capital requirements from minimum requirements towards buffers increases flexibility but comes at the expense of simplicity and may favor banks with complex activities.
  - While buffers can be released and drawn down as needed—potentially enabling CET1 to be usable in stress—this approach increases complexity and can create confusion between objectives (enhancing flexibility vs. ensuring risks are adequately captured under Pillar 2).
  - There is a danger that macroprudential buffers cannot absorb losses from the same risks currently capitalized in Pillar 2A; once buffers are released and used, there will be less capital (i.e., lower Pillar 2A) to cover risks that are unlikely to disappear in a crisis (e.g., concentration risk, one-way risk, risk arising from illiquid exposures).
  - Only banks with substantial P2A capital add-ons (typically those with large illiquid exposures and excessive concentration risks) will be able to offset the increase in the CCyB.
  - The policy may provide limited incentives to better manage certain risks (e.g., limiting concentration risk or wrong way risk) since reducing add-ons reduces offsetting possibilities.
- Monitoring and review:
  - Monitoring the effect of the policy through time will be important ahead of the PRA review of its P2A methodologies, which is scheduled for 2024.
  - The PRA judges that, conditional on a firm having exhausted its buffers, the proposed reduction in Pillar 2A would not materially affect the remaining resilience provided by minimum requirements (based on its own cost benefit analysis).

*International Monetary Fund — UNITED KINGDOM (excerpts).*

### 96.      The PRA and FCA have a full panoply of legal powers at their disposal to use in the

### 1gbrea2022006 - 96.      The PRA and FCA have a full panoply of legal powers at their disposal to use in the

### Enforcement powers and supervisory tools
- The PRA and the FCA have a full panoply of legal powers for supervision of firms, including:
  - sanctions under the SMCR;
  - imposing requirements (including a requirement to do or not do a specified action) under sections 55L and 55M of FSMA;
  - Threshold Conditions modifications;
  - self-wind downs;
  - unlimited financial penalties and public censure of firms and individuals (powers set out in sections 56 and 66 FSMA for individuals, section 192K for parent undertakings, and sections 205 through 206A for firms; procedural requirements in Parts V and XIV FSMA).
- The PRA and FCA have issued statements of policy or handbooks outlining their approach to enforcement.
- The PRA applies a “comply or explain” approach; the FCA applies an “assertive supervision” approach and tends to resolve matters informally during the supervisory process.
- Moral suasion by the PRA and FCA has been generally effective in addressing and correcting deficiencies at individual firms.
- The PRA and FCA may apply sanctions to individual approved persons (including Significant Influence Function holders) where they breach FCA or PRA rules of conduct or are knowingly involved in a firm’s breach; sanctions may include:
  - making public statements of the misconduct;
  - imposition of fines;
  - suspension from performing approved functions;
  - withdrawal of approval or prohibition from performing functions for a suitable period.

### Use and limitations of formal enforcement
- The PRA and FCA should use their broad sanctioning authorities as supervisory tools where appropriate and should not hesitate to impose requirements on firms (e.g., to do or not do a specified action under sections 55L and 55M of FSMA) or modify/waive rules.
- Supervisors would benefit from additional guidance on relevant supervisory and legal principles and risk factors to facilitate the use of these powers.
- Earlier collaboration between supervisors and legal colleagues should be encouraged from the time a potential issue first arises.
- The PRA and FCA have acted against firms and individuals; the FCA has changed its approach since the 2016 FSAP and employs a range of tools from formal investigations to early intervention measures.
- In 2020, the PRA imposed its largest financial penalty along with the FCA in a globally coordinated resolution with a firm.
- Contested proceedings before the PRA’s Enforcement Decision Making Committee (EDMC) are relatively infrequent.
- PRA enforcement data referenced for 2014-2020; FCA Enforcement data referenced Annual Report 2020/21 July 2021.

### Key policy recommendations (section C and related)
- Enhance the prudential framework by:
  - Reflecting reputational risk in the potential impact (PI) methodology and providing guidance on how to embed climate-related financial risks when scoring firms’ individual risk elements.
  - Conducting more frequent and in-depth firm-specific onsite reviews of relevant activities, including CIB business lines and related risk management practices to supplement horizontal cross-firm work.
  - Sharing at the appropriate level of seniority detailed onsite reports following onsite reviews to increase transparency and ensure timely feedback to firms between two PSMs; providing more detailed findings and recommendations with timeframes; and using S166 reviews proactively for a broader range of firms while developing PRA capabilities (including technological skills).
  - Using the forthcoming implementation of the Strategic Review findings to ensure better consistency of supervisory approaches across UKDT and ARTIS and carefully considering pros and cons before adjusting supervisory intensity on non-systemic firms.
  - Reassessing periodically whether the approach to supervising international firms delivers expected supervisory outcomes and balances U.K. financial stability with an open global financial system.

- Further strengthen governance, credit risk, operational risk, Pillar 2, and enforcement by:
  - Using the whole range of powers provided by the SMCR and remuneration framework to ensure senior manager accountability; introducing detailed binding requirements on governance and risk management for third country branches.
  - Implementing a more active supervisory role in assessing loan classification and provisioning; conducting deep dives of models used for ECL calculation; phasing out guidance on payment deferrals to require banks to assess and classify loans case-by-case.
  - Introducing a clear expectation that firms should set limits on single name, geographic and sectoral risk concentrations as part of their ICAAP.
  - Implementing a more proactive review of internal models; increasing resources for review of firms’ internal models used for regulatory purposes; providing guidelines on calibration of IRB parameters after COVID-19.
  - Seeking additional statutory powers to review and examine resilience (including cyber resilience) of critical services provided by third party providers (including but not limited to cloud services); hiring more staff with appropriate technological skills or using S-166 reviews to increase capacity and better assess cloud outsourcing risks.
  - Improving cross-firm consistency when setting the PRA buffer; aligning the frequency of deep dive C-SREPs for all Category 1 firms; periodically reassessing whether the capital buffer calculation framework is effective for new banks.
  - Monitoring over time the effect of the decision to shift the balance of capital requirements from Pillar 2 capital add-on towards buffers.
  - Utilizing the full panoply of enforcement tools where appropriate and providing more guidance to supervisors on relevant legal principles and risk factors to increase effectiveness and frequency.

### Selected implementation status and observations (Appendix I highlights)
- Reputational risk: Ongoing — changes to scoring methodology introduced, but Potential Impact (PI) scope does not explicitly include reputational risk.
- PRA resourcing and operating model: Ongoing — flexibility exists but overall resources remain stretched.
- Supervision of less systemically important firms: Ongoing — intensity increased but further improvements needed (more testing and independent verification).
- Deep-dives and firm-specific onsite reviews: Partially implemented — increased use of cross-firm thematic reviews, but firm-specific onsite reviews could be used more often.
- Individual accountability and SMCR: Ongoing — SMCR produced positive results in accountability but powers not fully tested.
- Model change review policy: Implemented.
- Loan-level information and supervisory guidance: Partially implemented — loan level data limited (owner occupier mortgage, buy-to-let, loans over £100 million); loan-by-loan data rarely used.
- Asset Quality Reviews and credit file coverage: Partially implemented — coverage over a three-year period for Category 1 firms is between 40 and 60 percent; credit reviews conducted every 3 years for material portfolios in non-systemic firms; limited number of AQRs involving review of credit files.
- Requirement to set quantitative thresholds for concentration risk: Not implemented — PRA considers its Rulebook compliance in substance, but banks are not formally required to set quantitative thresholds.
- Related party reporting: Ongoing — CRD V introduces requirement for data on loans to members of management body and related parties; PRA proposing amendment to Related Party Transaction Risk Part.
- CP 29 (backstops for lowest risk categories) reported as Implemented by authorities.

*Source: 1gbrea2022006 - 96. The PRA and FCA have a full panoply of legal powers at their disposal to use in the (PDF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1gbrea2022006.pdf_