Guidance

SoP – The PRA’s approach to the implementation of the O-SII buffer

Chapter

O-SII buffer capital implications

Printed on: 06/11/2024

Rulebook at: 29/12/2020

3

O-SII buffer capital implications

3.1

The Capital Requirements Directive (2019/878/EU) specifies that the level of application of the O-SII buffer is determined on the basis of the nature and distribution of the risks embedded in the structure of the O-SII. The O-SII buffer can be used where there is a risk of disruption in the financial system with the potential to have serious negative consequences for the financial system and the real economy of a specific member state.

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3.2

The O-SII buffer is a firm-specific buffer (ie its amount may vary from firm to firm). It is based on a firm’s worldwide risk-weighted exposures and each firm will be required to ensure that it is met solely with Common Equity Tier 1 capital.

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3.2A

Where it has decided to impose an O-SII buffer on a firm that is subject to the O-SII buffer, the PRA will invite that firm to apply for a requirement to be imposed on it under section 55M of FSMA in order to set the O-SII buffer. Where firms do not apply, the PRA would consider imposing such a requirement on its own initiative. The requirement would have the effect of increasing the size of the combined buffer a firm must meet to avoid restrictions on distributions. This is in line with the approach taken with regard to the PRA’s implementation of the global systemically important institutions (G-SII) buffer, which is also a firm-specific buffer, and is set using the PRA’s powers under section 55M FSMA.

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3.3

Firms that are subject to the O-SII buffer will be prevented from using capital maintained to meet the O-SII buffer to meet any other capital requirements or buffers. Where a firm that is subject to an O-SII buffer is subject to both a G-SII buffer and an O-SII buffer on the same basis of consolidation, the higher of the two shall apply.

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3.4

Group risk[4] may arise when an RFB is subject to an O-SII buffer at the level of the RFB sub-group,[5] but the consolidated group is either not subject to a G-SII buffer, or its G-SII buffer rate is lower than its O-SII buffer rate. In May 2016 the FPC recommended to the PRA that it should seek to ensure that, where systemic buffers apply at different levels of consolidation, there is sufficient capital within the consolidated group, and distributed appropriately across it, to address both global systemic risks and domestic systemic risks.[6]

  • 4. Group risk, as defined in the PRA Rulebook (Internal Capital Adequacy Assessment 1.2), means the risk that the financial position of a firm may be adversely affected by its relationships (financial or non-financial) with other entities in the same group or by risk which may affect the financial position of the whole group, including reputational contagion.
  • 5. An RFB sub-group is a subset of related group entities within a consolidated group, consisting of one or more RFBs and other legal entities, which is established when the PRA gives effect to Article 11(5) of the CRR.
  • 6. See Chapter 4 of FPC framework available at https://www.bankofengland.co.uk/paper/2016/the-financial-policy-committeesframework-for-the-systemic-risk-buffer.
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3.5

The PRA amended its Statement of Policy on its methodologies for setting Pillar 2 capital[7] to take account of this type of group risk when assessing capital adequacy at the consolidated group level under Pillar 2 to ensure that sufficient capital of appropriate quality is held within, and distributed appropriately across, the consolidated group to cover the risks faced by the RFB sub-group itself and, separately, group entities that are not members of the RFB sub-group.

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3.6

As indicated in SS45/15 ‘The UK leverage framework’,[8] firms that are subject to a non-zero O-SII buffer will also be subject to an additional leverage ratio buffer (ALRB) rate. As set out in the June 2018 Financial Stability Report, the FPC intends to review the UK leverage ratio framework once there is clarity on the finalised implementation of the leverage ratio requirement in EU law.[9] 

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