Prudential Regulation Authority Rulebook

4.1

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4.2

The PRA uses a quantitative scoring methodology to inform its assessment of which firms should be designated as O-SIIs. The scoring methodology measures activities that are critical to the UK economy and financial system, in line with the PRA’s focus on the risk of disruption to the continuity of supply of critical economic functions.

4.3

The scoring methodology reflects a firm’s potential to affect adversely the stability of the system by failing, coming under stress, or the way it carries on its business. This effect can take place through two broad channels – the first is directly, through the impact on real economic activity or on the soundness of other participants, and so the provision of financial services to the economy as a whole. The second is indirectly, through behavioural effects where vulnerabilities within one firm affect confidence in other firms with similar business models or products.

4.4

In identifying O-SIIs, the PRA will take into consideration the list of credit institutions and investment firms classified as ‘Category 1’ under its internal potential impact framework. The PRA’s approach to banking supervision document^[4] defines ‘Category 1’ firms as the most significant deposit takers and designated investment firms whose size, interconnectedness, complexity and business type give them the capacity to cause very significant disruption to the UK financial system (and through that to economic activity more widely) by failing or by carrying on their business in an unsafe manner. The scale of such adverse effects depends both on the functions a firm provides, and its significance within the financial system. Some of the critical economic functions that firms provide are: payment, settlement and clearing; retail banking; corporate banking; intra-financial system borrowing and lending; investment banking; and custody services. The scale of a firm’s potential impact also depends on its size, complexity, business type and interconnectedness with the rest of the financial system.

4.5

The PRA calculates firms’ scores based on the indicators set out in Table 1 of Appendix 1, in line with the calculation method outlined in Appendix 1. This score is then used in combination with supervisory judgement to determine whether to designate firms as O-SIIs. The PRA expects to designate firms whose score exceeds 100 basis points as O-SIIs, unless those scores only exceed that point because of their activity conducted in the United Kingdom through third-country branches of overseas firms.

4.6

The PRA may designate firms as O-SIIs whose score is below 100 basis points.
(i) Firms scoring just below 100 basis points may be designated as O-SIIs if the PRA judges that they are systemically important to the UK economy.
(ii) The quantitative elements of the O-SII assessment methodology are applied at the highest level of consolidation in the UK, but some subsidiaries of overseas groups do not have a single consolidation in the UK. Where one of the subsidiaries has been designated as an O-SII, the PRA can use supervisory judgement to designate any of its sister subsidiaries in the UK as O-SIIs, if interdependencies between the subsidiaries mean that the resilience of the O-SII could be threatened by the failure of a sister subsidiary.
(iii) The PRA otherwise judges as part of its supervisory activities that a firm is systemically important to the UK economy or financial system.

4.7

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4.8

The PRA notes that O-SII designation does not automatically result in higher loss absorbency requirements in the form of an O-SII buffer or otherwise. An O-SII buffer can only apply to O-SIIs or part of an O-SII that are ring-fenced bodies (RFBs) or large building societies. The Financial Policy Committee (FPC) maintains the framework for setting O-SII buffer rates,^[5] according to which, O-SII buffer rates are determined based on firms’ UK leverage exposure measure.^[6] The PRA sets O-SII buffer rates annually based on the FPC’s framework. The PRA has separately set out its approach in applying the FPC’s framework.^[7]