The Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014

EXPLANATORY NOTE

(This note is not part of the Regulations)

These Regulations implement in part the provisions relating to capital buffers in Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (OJ no L176, 27/6/2013, p. 338; for corrigenda see OJ no L208, 2/8/2013, p.73). This directive (“the capital requirements directive”) is part of a package of EU legislation commonly known as “CRD4”. Articles 128 to 142, 160 and 162 of the capital requirements directive are concerned with capital buffers. Further implementation of the capital buffers provisions will be achieved through rules, or other binding requirements, imposed by the Prudential Regulation Authority (“PRA”) and Financial Conduct Authority (“FCA”).

The Regulations also make provision in relation to the notification procedure under Article 458 of Regulation 575/2013/EU of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (OJ no L176, 27/6/2013, p.1, for corrigenda see OJ no L208, 27/6/2013, p.68 and OJ no L321, 30/11/2013, p.6) (“the capital requirements regulation”).

Part 1 contains provisions relating to commencement, cessation and interpretation. The countercyclical capital buffer commences on 1st May 2014 and the other capital buffers commence on 1st January 2016.

Part 2 is concerned with the capital conservation buffer (Articles 129 and 160 of the capital requirements directive). The buffer rate is set at 2.5% under Article 129(1), subject to the transitional provisions at Article 160 which are implemented by regulation 5. The FCA is given the power to exempt small or medium-sized investment firms in appropriate circumstances.

Part 3 is concerned with the countercyclical capital buffer (Articles 130, and 135 to 140, of the capital requirements directive). Under the capital requirements directive, institutions must calculate an institution-specific countercyclical capital buffer rate by taking a weighted average of the countercyclical buffer rates set by macro-prudential regulatory authorities in the countries in which its exposures are located. By virtue of regulation 10, the Financial Policy Committee (a statutory sub-committee of the Court of the Bank of England) will set the buffer rate for the United Kingdom. Regulations 13, 14 and 15 specify the circumstances in which the Financial Policy Committee may recognise or set a buffer rate for a country other than the United Kingdom.

Part 4 is concerned with the “G-SII” buffer (Articles 131 and 162(5) of the capital requirements directive). G-SII is a term used in the capital requirements directive as an abbreviation for “global systemically significant institution”. Under Part 4, the PRA must identify G-SIIs using an identification methodology and various sub-categories, with the buffer rates for each sub-category specified by regulation 24(6). The transitional provisions at Article 162(5) of the capital requirements directive are applied by regulation 28.

Part 5 is concerned with “O-SII”s (Article 131 of the capital requirements directive). O-SII is a term used in the capital requirements directive to describe “other systemically significant institutions”. Under Part 5, the PRA must identify O-SIIs. However, the the provisions of the capital requirements directive requiring O-SIIs to maintain a specific O-SII buffer are not mandatory and the United Kingdom is not implementing them.

Part 6 provides that the PRA and FCA are responsible for requiring institutions to comply with the combined buffer requirement. The combined buffer required is the total amount of Common Equity Tier 1 capital required to meet all the buffers which apply to an institution.

Part 7 amends the Bank of England Act 1998 to make provision for the notification procedure under Article 458 of the capital requirements regulation.

A Transposition Table setting out how the relevant provisions of the capital requirements directive are transposed into UK law is available from Her Majesty’s Treasury, 1 Horse Guards Road, London SW1A 2HQ.

Impact assessments of the effect that these Regulations will have on the costs of business and the voluntary sector are available from Her Majesty’s Treasury, 1 Horse Guards Road, London SW1A 2HQ and from—

(a) http://www.legislation.gov.uk/ukia/2013/1156/pdfs/ukia_20131156_en.pdf ) in relation to the macro-prudential measures; and

(b) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/223566/PU1488_Banking_reform_consultation_-_online-1.pdf in relation to the other measures.