Industry response

Our response to PRA CP 1-15

Assessing capital adequacy under Pillar 2

Overview

The BSA welcomes the opportunity to comment on the PRA’s proposals for Pillar 2. We agree that updating is needed in light of both CRD 4 and the EBA’s guidelines on SREP.

The BSA particularly supports two features of the CP proposals:         (i) realigning the Pillar 2 framework with the PRA’s own approach document, especially the impact categorisation, with an expectation of lower Pillar 2A requirements for smaller firms; and (ii) the transparency achieved by publishing reasonable detail about the  Pillar 2 methodologies used by PRA.

The former should achieve a more proportionate outcome for smaller firms, such as most building societies. The latter should counteract perceptions that the Pillar 2 process is arbitrary and subjective, and enable societies themselves to benefit from understanding these methodologies.

We note that the methodologies relating to IRRBB, market risk and counterparty credit risk are not changing, and therefore PRA is not soliciting comments on those chapters. But the BSA agrees that it is helpful for them to be published alongside the remaining methodologies which are open for comment.

In this response, we comment in more detail below on specific topics of direct relevance to building societies. We have identified some concerns relating to methodologies for credit risk, operational risk and concentration risk, where in some instances the PRA proposals create perverse incentives for behaviour that is more risky overall. Within credit risk, we comment specifically on high LTV and mortgage insurance, buy to let, and self-build. We also address the treatment of conduct risk. Abbreviations used in the CP are also used in this response, without further definition.

Read the full response.