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[LONDON] UK banks will need to have capital to cover losses that occur in situations of extreme stress, ensuring that they continue to meet minimum capital requirements, according to the Bank of England.
In its new approach to setting so-called Pillar 2 capital requirements for British banks, the BOE's Prudential Regulation Authority announced a "PRA buffer" designed to "absorb losses that may arise under a severe, but plausible stress," in line with European Union rules, the regulator said on Wednesday as it rolled out the approach.
The PRA buffer, which replaces the capital-planning buffer, will be imposed when the regulator judges a bank's risk management and governance to be "significantly weak." This assessment will be "informed" by the BOE's and the lenders' own stress tests. The extra requirement will only kick in when existing buffers are deemed insufficient.
"Firms must hold adequate capital to support the risks in their business, ensuring financial stability and continuity in the provision of key services to the wider economy," PRA Chief Executive Officer Andrew Bailey said in a statement.
The requirements "play an important role in ensuring firms have adequate capital and are a valuable tool for implementing the PRA's forward looking judgment-based supervisory approach." Banks are required to hold a minimum level of capital set by EU and UK laws based on international agreements.
In addition, supervisors have discretion to set Pillar 2 requirements, intended to "enhance the link between an institution's risk profile, its risk management and risk mitigation systems, and its capital planning," according to the European Banking Authority.
Under these supervisory requirements, the PRA has scope to demand lenders hold more capital to capture risks specific to their business models that aren't covered by other buffers and risks that may emerge in the future, perhaps as a result of changed economic circumstances.