Prudential Regulation Authority Rulebook

5.1

Firms are required to monitor their Solvency Capital Requirement (SCR) on an ongoing basis. In the event of a breach, or potential breach within the following three months, of the SCR or Minimum Capital Requirement (MCR), firms are required to inform the PRA, and provide either a realistic recovery plan or finance schedule according to the requirements in the PRA Rulebook, Undertakings in Difficulty 3.1 and 4.1. If a MTE coincided with a declaration of an exceptional adverse situation then there is also the possibility that the recovery period could be extended, by a maximum of seven years.

5.2

The PRA recognises that for some events, it might take some time for firms to gather reliable and stable loss estimates. Nevertheless the PRA expects firms to consider in advance how they could gather information as quickly as practicable after a major event to assess the likely impact on their financial positions, to enable their boards and senior management to respond as necessary.

5.3

Although firms might assume that additional capital would be available quickly after a MTE, either to help restore a firm’s solvency position, or to provide funds to enable additional business to be written, the PRA expects firms to also consider what actions might be required in the event that further capital was not available as quickly as assumed (e.g. if the MTE occurred at a time of wider financial market disruption, if investor appetite was less than anticipated due to multiple firms attempting simultaneous recapitalisation, or if additional capital from other group companies was not available).

5.4

As with any adverse situation, firms impacted by a MTE would be required to keep the PRA informed of their assessment of the impact of the event on their financial position, their strategy and business plans, their operational capabilities, and any other issues that might be material to the PRA’s prudential assessment. The PRA would also expect firms to keep their supervisors updated if their assessments changed over time.

5.5

The PRA rules require firms to remain adequately capitalised at all times.^[8] For internal model firms, this includes a period in which a model change application is being reviewed by the PRA. The PRA may consider using supervisory tools (including as a temporary measure) to ensure that any risks are adequately mitigated where an internal model no longer meets the required tests and standards.