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Building the pillars

As the PRA releases a new consultation paper on adjustments to Pillar 2A, Neeraj Kapur, chairman of the Financial Services Faculty, assesses their potential impact and implications.

The February consultation paper (CP) 3/17 from the Prudential Regulation Authority (PRA) sets out proposed adjustments to the bank Pillar 2A capital framework. Through Pillar 2 the PRA sets capital add-ons for risks for each firm individually which are either not captured (such as pension risk not captured in the credit risk weights), or risks that are not fully captured (credit risk for especially high risk credit books).

The CP is part of the PRA’s response under its secondary objective to foster competition in the financial services markets. It responds to calls from smaller banks and building societies for a more level playing field, when comparing capital requirements under the Internal Ratings Based (IRB) approach with the Standardised Approach (SA) most of the smaller players use.