The Codes apply to all employees, although there are particular provisions applicable to Code Staff, which includes Senior Managers and other material risk takers. Under the Codes, various principles are applicable to an employee's 'remuneration' which includes all forms of salary and benefit payments, including in kind benefits.
This includes the following principles:. There must be an appropriate ratio of fixed to variable components of remuneration. Banks should adjust non-vested deferred amounts to reflect actual outcomes. Guaranteed bonuses should be exceptional and limited to new staff. Contract termination payments should not reward failure. Banks should also have policies and procedures in place to ensure that Code Staff do not engage in personal investment strategies that undermine the Code principles, such as insurance or hedging against the risk of performance adjustment.
This approach has been criticised by the EBA and the European Commission has proposed exemptions for smaller firms from the quantitative requirements based on a EUR 5 billion threshold, which would have the effect of bringing into scope those UK banks with assets of between EUR 5 billion and GBP15 billion. The implementation timetable for these changes remains uncertain.
What are the risk management rules for banks? A bank must be able to identify, manage, monitor and report actual or potential risks through adequate risk management policies and procedures and risk assessments. Specific risks that a bank must plan for are:. Credit risk: the risk of a counterparty of the bank defaulting on its financial obligations. Market risk: the risk of potential losses arising from changes in the price of an asset.
Liquidity risk: the risk that there will be no demand for an asset when it is sold. Leverage risk: the risk of losses being amplified due to excess debt in the capital structure. Operational risk: the risk of loss resulting from the failure of internal processes, people and systems or from external events. Concentration risk: the risk of losses being amplified due to overexposure to a particular asset class or counterparty.
Residual risk: the risk that credit risk mitigation techniques are ineffective. Securitisation risk: the risks stemming from the use of securitisation structures. Interest rate risk: the risk of adverse movements in interest rates impacting the bank's financial condition.
Banking regulation in the UK: overview
Pension obligation risk: the risks of being unable to meet pension obligations. Group risk: the risks arising from exposures to parent, subsidiary and affiliate companies. Reputational risk: the risk of an adverse impact on the bank's reputation. A bank establishes and maintains an independent risk management function implementing its policies and procedures and reporting to or advising senior personnel accordingly. The risk control arrangements should where appropriate considering the bank's size, nature and complexity include a chief risk officer CRO and a board-level risk committee.
The CRO should, among other things, be accountable to the board, be fully independent of business units, have sufficient stature and authority to execute the responsibilities, and have unfettered access to any part of the bank's business that impacts its risk profile. The CRO is expected to report to the chief executive, chief finance officer or other executive directors. A risk committee should be headed by a non-executive director and be mainly comprised of non-executive directors. The risk committee oversees and challenges the bank's risk monitoring and management and advise the board on risk strategy and oversight.
A bank's internal control mechanisms and procedures must permit verification of its compliance with rules adopted under CRD IV at all times. Liquidity and capital adequacy Role of international standards. What international standards apply? Broadly speaking, the CRD governs access to deposit-taking activities and the CRR establishes the prudential requirements applicable to regulated financial institutions.
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What liquidity requirements apply? All UK incorporated banks are subject to high-level, qualitative and quantitative liquidity requirements. Branches of foreign banks are subject to high-level requirements only. Detailed common reporting requirements also apply. All banks are subject to PRA Fundamental Rule 4, which requires a firm to maintain adequate financial resources.
The qualitative requirements for UK banks focus on governance and senior management oversight of liquidity risk, measurement and management of liquidity risk, stress testing and contingency funding plans. This ensures that banks hold a buffer of unencumbered high quality liquid assets to meet liquidity needs under a day stress scenario. The reporting regime requires UK banks to provide liquidity data to the PRA, including daily liquidity reports, weekly mismatch reports, weekly pricing data, monthly marketable assets reports, monthly funding concentration reports, quarterly retail funding reports, and quarterly systems and controls questionnaires.
All UK are subject to the "overall liquidity adequacy rule" that every UK-authorised bank must be self-sufficient in terms of liquidity adequacy. This subjects banks to an individual liquidity adequacy process ILAAP which requires banks to identify, measure, manage and monitor liquidity and funding risks across different time horizons and stress scenarios, consistent with the risk appetite established by the firm's management body.
As part of this process, banks must complete an ILAAP document at least annually as part of the supervisory liquidity review process, following which the PRA may issue individual liquidity guidance on the quantity of the bank's liquid asset buffer and its funding profile. Article 8 2 of the CRR recognises that in certain circumstances it may be appropriate for banks to rely on liquidity resources of other group members, subject to conditions on unhindered transferability of liquidity resources within the UK sub-group. The second component of the Basel III liquidity standards is the Net Stable Funding Ratio NSFR , which is intended to complement the LCR in requiring banks to maintain adequate sources of stable funding to withstand conditions of extended stress over a one year time period.
Is a leverage ratio applicable? CRD IV introduced a new leverage ratio-based capital requirement, based on the relationship between Tier 1 capital and total assets and off-balance sheet exposures. This is supplemented by requirements for policies and procedures for identifying, managing and monitoring excessive leverage risk. At EU level, disclosure requirements in relation to leverage risk commenced on 1 January The European Commission also made clear that it would consider implementing a supplemental G-SII leverage buffer if appropriate to reflect agreed global standards.
The requirement is set out in the PRA rules, together with specific regulatory reporting and public disclosure requirements for UK banks. What is the capital adequacy framework that applies for banks? A bank must maintain at all times financial resources equal to or greater than its risk-weighted assets as a cushion of cash, reserves, equity and subordinated liabilities available to the bank to absorb losses during periods of financial stress.
CRD IV raised the threshold in terms of the quantity and quality of capital a bank is required to hold, with only two categories of permitted financial resources:. There are limits placed on the amount of Additional Tier 1 and Tier 2 capital that are recognised as financial resources and the use to which such capital can be put. Capital requirements apply to the trading and non-trading books.
To calculate capital requirements in the non-trading book, banks can follow the standardised approach or subject to regulatory approvals adopt the 'internal ratings based' IRB approach. Under the standardised approach, used by most small banks, assets are given a pre-determined risk weighting set according to the type of asset in question. The trading book attracts a set of rules covering market risk, position risk requirements for interest rate risk, equity risk, commodities risk, currency risk and risks associated with options and collective investment schemes.
The market risk rules allow for a variety of approaches to risk weighting depending on the sophistication of the bank, including models-based approaches. The PRA has discretion to impose additional capital requirements and has historically exercised it liberally with respect to banks under Pillar 2. In line with Basel III, CRD IV also requires the introduction by member states of a regime for the imposition of capital conservation and countercyclical capital buffers.
The FPC has delegated authority from the Bank for setting the policy framework and rates for the countercyclical buffer. Under the Pillar 3 requirements, banks are required to make disclosures about among others :. Capital structure. Credit risk and equities in the non-trading book. Operational risk and interest rate risk in the non-trading book. Use of external credit assessment institutions 'ECAIs'. MREL requirements are specified by the Bank on a case by case basis. Certain liabilities are excluded from the application of bail-in powers, including protected deposits, secured liabilities, client assets, and most employee and pensions liabilities, trade and short term liabilities.
Consolidated supervision Role and requirements. What is the role of consolidated supervision of a bank in your jurisdiction and what are the requirements? Role As consolidated supervision in the UK is ultimately derived from the principles and standards of the Basel Committee on Banking Supervision BCBS , it performs the same role in the UK as it does elsewhere: to ensure that prudential supervision of a bank looks to the strength of the bank's group, and not just the bank itself.
Requirements The CRR rules define the scope of a group and the prudential requirements that apply to it and set out the calculations of both group capital requirements and group capital resources. Capital requirements are set and reporting is made at the level of the relevant group as well as the particular entity within the group.
International co-ordination and co-operation. To what extent is there co-operation with other jurisdictions? The PRA permits firms to include requirements calculated on the basis of non-EEA regulators' rules only where it has deemed those rules to be CRD IV equivalent and where the firm has no reason to believe that using those calculations would produce lower requirements than under the CRR rules such a firm being a recognised third country credit institution. What reporting requirements apply to the acquisition of shareholdings in banks?
Under section of the FSMA, a person who decides to acquire or increase control over a UK-authorised bank must give the PRA notice in writing before making the acquisition and in the case of acquiring or increasing control must await the positive consent of the PRA or the expiry of the statutory assessment period of 60 working days before making the acquisition.
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Within the scope of "control" are indirect control, that is, control that A has through one or more intermediate holding companies between A and B, and situations where A is acting in concert with another person. Reduction in control between these thresholds or ceasing to have control also generate written notification obligations to the PRA. Failure to comply with the statutory notification requirements in connection with changes in control is a criminal offence.
In December , the EBA and other EU supervisory authorities published revised guidelines which have applied from 1 October on a "comply or explain" basis. These have not been adopted in the UK. Where a bank's shares are listed or have been admitted to trading on a regulated market e. What approval requirements apply to the acquisition of shareholdings and of control of banks? When a bank applies for PRA authorisation, both the PRA and the FCA must be satisfied that it meets their respective threshold conditions and that the bank is fit and proper having regard to all circumstances.
A bank must submit detail of owners, influencers and controllers to the PRA as part of the authorisation process. Any acquisition or increase of control see Question 20 in a bank must receive prior approval from the PRA.
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At this stage, the PRA must consider the suitability of the person and have regard to the person's likely influence over the bank. The PRA considers the following aspects:. The reputation of the person and any person who will direct the business of the UK bank as a result of the proposed acquisition or increase. Whether the bank will be able to comply with prudential requirements and whether effective supervision and regulatory co-operation will still be possible. Any reasonable grounds to suspect that the acquisition may be connected with or increase the risk of money laundering or terrorist financing activity.
Foreign investment. Are there specific restrictions on foreign shareholdings in banks? Apart from the requirement for the bank to continue to meet the threshold conditions and the assessment criteria associated with acquisitions of control see Question 20 , there are no restrictions on foreign investment in banks except where the acquirer is subject to UK, EU or UN sanctions. Prospective bank investors located in a non-Financial Action Task Force FATF compliant jurisdiction are likely to have difficulty getting approval from the PRA on the basis that money laundering and terrorist financing risk is one of the mandatory assessment criteria under the FSMA change in control regime.
Resolution What is the legal framework for liquidation of banks? Under section 94 of the BA , the bank insolvency process can only be commenced by a court order and only the BoE, the PRA or the Chancellor of the Exchequer can apply for such an order. Commercial banks shall put in place appropriate Customer Profile database and undertake due verification of the accuracy, needs, risk tolerance and suitability of the customer.
Buy Banking And Financial Institutions: A Guide For Directors, Investors, And Counterparties
The commercial banks shall not provide services and products that do not meet the needs and risk capacity of the customer. When conducting investment and trading related activities, commercial banks shall analyze the counter-party credit risk, market risk and legal risk, and put in place appropriate management of risk exposures to their counter-parties. Especially when there are significant changes in market environment, the banks shall track the risk profiles of their counter-parties closely, and take effective countermeasures to withstand risks.
Management Mechanism. The Board should ensure that the senior Management team has sufficient financial resources and qualified personnel to implement strategy and manage the risks associated with the process of financial innovation. The Board should ensure that the innovation strategy and policy fit in with the overall development strategy and risk management policy of the commercial bank as a whole. The senior Management team is responsible for the proper implementation of the financial innovation strategy and risk management policy.
The implementation shall include the establishment of appropriate risk management and internal control system, the proper documentation and audit trail of business processes, and the appropriate training and feedback on the delivery of the new business services and products. The business process must include the analysis of market needs, targeted customers and cost-benefit, as well as scientific risk evaluation and pricing process, with which the risk-adjusted return can be accurately calculated. Article 22 The commercial banks shall have proper documentation process, which identifies the audit trail, operational responsibilities and provides proper process manual and user or consumer explanatory material, before any financial innovation.
The objective is to enhance the level of customer service and satisfaction with the financial innovation. An appropriate incentive structure shall be put in place to encourage further financial innovation. We are active in countries. Discover our projects! Our recently approved projects. Our initiatives. Projects to be financed. Financed projects. Project cycle. Operations evaluation. The Blog: People Stories Ideas. Impact Europe: Get our newsletter.
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