The U.K. agency in charge of prudential regulation and supervision this week released its roadmap to strengthen capital standards and comply with other changes triggered by the European Union's Capital Requirements Directive.

The Prudential Regulatory Authority (PRA) said the changes will affect banks, building societies, and investment firms regulated by the PRA, but will not affect insurance firms. Borne out of the financial crisis, the Capital Requirements Directive (CRD IV) is a package of regulations implementing Basel III, the international regulatory framework for banks. The package includes stronger capital standards, both in amount and the quality of capital held by banks, greater risk coverage, expanded disclosure requirements, and reduced procyclicality. The package sets forth liquidity standards and new leverage disclosure requirements. EU member states are required to align their laws with the new regulations, most of which take effect in January.

U.K. lawmakers say while the CRD IV will bring with it some important changes for firms, those changes may not be as dramatic because of steps already taken by the PRA to ensure capital of major banks and building societies reflects expected future losses and a better calculation of risk weights. Details of the changes and the timeframe for implementing the changes are outlined in the PRA's consultation paper.

“Well capitalized and resilient firms are crucial for ensuring financial stability and supporting U.K. growth,” Andrew Bailey, deputy governor of prudential regulation for the Bank of England and CEO of the PRA, said in a statement. “The PRA has already acted to increase both the amount and quality of capital held by firms, reflecting our determination to improve the stability of U.K. firms after the crisis. This has put U.K. firms in a good position to meet the new requirements whilst continuing to provide banking services and support lending to the real economy.”

Under CRD IV, firms will find a greater emphasis on the highest quality of capital, known in the regulations as Core Equity Tier 1 (CET1) and tougher criteria as to what qualifies as CET1. The new minimum Pillar 1 capital requirements proposed by PRA call for firms to have a Common Equity Tier 1 of 4 percent for risk weighted assets in 2014, bumped up to 4.5 percent beginning in January 2015. The threshold for Tier 1 (CET1 plus additional Tier 1) would grow from 5.5 percent in 2014 to 6 percent in 2015. Total capital for Tier 1 and Tier 2 would be at 8 percent, both in 2014 and after January of 2015.

Firms also will find changes in capital requirements for Pillar 2, which covers internal capital assessment and its supervisory review. The aim of Pillar 2 is to guarantee that firms have adequate capital to support all of the risks in their businesses, which is then divided into capital held against risks not captured or not fully captured by regulations (Pillar 2A) and longer-term risks a firm may become exposed to over a forward-looking period (Pillar 2B).

The PRA considers Pillar 2A capital as the minimum level of capital firms should have. Currently Pillar 2A can be met with any regulatory capital. The new rules would require firms to have at least 56 percent of that made up by CET1 capital as of January 2015. Regulators say that change would bring the quality of Pillar 2A capital in line with that of Pillar 1. The PRA is considering whether to require all of Pillar 2A to be met with CET1 capital only starting in January of 2016, or whether a different combination would be adequate.

In addition to the Pillar 1 and Pillar 2 capital requirements, all firms will be required to satisfy a combined capital buffer under CRD IV. The combined buffer requirement will be made up of a capital conservation buffer, a countercyclical capital buffer, and buffers to mitigate systemic risk where needed. Firms must use CET1 capital to meet the combined capital buffer requirements.

The PRA did not put forth any substantial changes relating to remuneration, instead deferring to work already done through the Parliamentary Commission on Banking Standards.

The PRA expects to publish its finalized rules in December. The consultation period ends 2 Oct.

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