Prudential Regulation Authority Rulebook

4.1

For firms that are subject to the leverage ratio capital requirement on an individual basis, the PRA will consider on a case-by-case basis replacing that requirement with a sub-consolidated requirement where a firm has subsidiaries that can be consolidated. In such cases, a firm may apply to the PRA for a permission under section 144G of FSMA that (i) dis-applies the requirements on an individual basis; and (ii) provides for the requirements to apply on a sub-consolidated basis in relation to the firm, with such modifications as may be specified in that permission. Even in such cases, however, individual requirements would continue to apply to subsidiary firms meeting one of the thresholds within the proposed sub-consolidation group. In the PRA’s approach, individual capital requirements ensure that capital can absorb losses where they occur. In the case of internationally active firms, this is also a Basel requirement.

4.2

The PRA will consider the following conditions to assess whether to grant the application: 

1. (i) the entities within the proposed sub-consolidation must be subsidiaries (as defined in the CRR) of the firm that is the ultimate parent of the sub-consolidation group. For example, this condition would be fulfilled when the firm at the top of the sub-consolidation group holds the majority of voting rights in the subsidiary undertaking, or is a member of the undertaking and has the right to appoint or remove a majority of the members of the management body of the subsidiary, or otherwise exercises dominant influence over the subsidiary undertaking, or it and the subsidiary undertaking are managed on an unified basis. The same conditions need to apply to all subsidiaries at each level of the sub-consolidation group;
2. (ii) evidence that leverage ratio risks and capital can effectively be managed and reported at sub-consolidated level: risk evaluation, measurement, and control procedures of the parent undertaking should cover the subsidiary, and the firm should be able to calculate the leverage ratio requirement and buffers (including a sub-consolidated CCyB rate) at sub-consolidated level;
3. (iii) evidence that effective governance is in place for the sub-group: the governance structure clearly allocates responsibilities for risk and capital decisions at sub-consolidated level for the firms included in the sub-consolidation; and
4. (iv) effective supervisory cooperation, including information exchange, in the countries where the subsidiaries are located, and transparent regulation / adherence to Basel standards. This would allow the inclusion of US and EU subsidiaries, for example.

4.3

The PRA would specify the scope of the sub-consolidation group in the permission and may also consider withdrawing this permission when the conditions are not fulfilled anymore.

4.4

With regard to condition (iv), i.e. that there be effective supervisory cooperation, including information exchange, in the countries where the subsidiaries are located, and transparent regulation and adherence to Basel standards, the PRA intends to rely as much as possible on the assessments of equivalence and supervisory cooperation made by PRA in relation to international banks, as set out in SS5/21.^[14] The PRA would base its analysis on a range of sources, which include the Basel capital and group supervision standards, the Basel Committee’s Regulatory Consistency Assessment Programme reviews,^[15] the International Monetary Fund’s Financial Sector Assessment Programme reviews,^[16] and the Financial Stability Board’s (FSB) peer reviews^[17] where appropriate, supplemented by other sources as necessary. The PRA will also take account of its own experiences in its interactions with the home state supervisors. It will also be important for the PRA to factor in any conduct concerns that the FCA may raise concerning a jurisdiction.

4.5

The PRA’s assessment on supervisory cooperation will also be informed by the existence of a memorandum of understanding (MoU) between the PRA and the supervisory authority in the foreign jurisdiction.^[18] Such MoUs establish a formal basis for: co-operation, including the exchange of information and investigative assistance; the facilitation of timely and effective supervision; and the identification of risks to the financial system, including emergency situations. Further, the assessment would be informed by adherence to the principles in the following Bank for International Settlements publications: ‘High-level principles for the cross-border implementation of the New Accord’,^[19] ‘Principles for effective supervisory colleges’,^[20] and Principle 13: Home-host relationships in ‘Core Principles for Effective Banking Supervision’.^[21]

4.6

Unregulated subsidiaries, which are not subject to Basel standards within equivalent jurisdictions, would not be excluded a priori. Assessing that a subsidiary meets the relevant conditions for Core and Non-Core Large Exposure Group membership may assist the PRA in its determination of whether sub-consolidation permission should be granted. However, it would not be determinative as they are distinct permissions and any assessment of whether it is appropriate to grant the sub-consolidation permission must be decided on a case-by-case basis.