Prudential Regulation Authority Rulebook

5.1

The PRA expects firms not in scope of the leverage ratio minimum capital requirement and buffers should manage their leverage risk so that their leverage ratio, as calculated in accordance with the Leverage Ratio (CRR) Part of the Rulebook, does not ordinarily fall below 3.25%.

5.2

The PRA expects firms not in scope of the leverage ratio requirement to meet the expectation with 75% CET1, i.e. the highest quality of capital.

5.3

The PRA expects that for a firm not in scope of the leverage ratio minimum capital requirement and buffers, the leverage ratio will not fall below 3.25% in the normal course of business or as part of its base business plan. The PRA acknowledges, however, that for such firms there may be occasions, such as in a systemic stress, or immediately following an idiosyncratic stress, where firms may not meet this expectation. Failure to meet the expectation does not create a presumption that a firm is breaching Chapter 11 of the ICAA Part or not meeting Threshold Conditions. The PRA would not expect the leverage ratio expectation to be met immediately following resolution. In line with ICAA 11.3, firms should take a forward-looking view of leverage risk in order to withstand stress events.

5.4

The PRA expects that firms should notify their supervisors as soon as practical if they do not meet or expect not to meet the PRA’s expectation. There will be no automatic consequences; but a firm which does not meet the expectation can expect enhanced supervisory attention, and should prepare a credible plan to reduce excessive leverage. If the PRA is satisfied with the rationale presented for not meeting the expectation, the PRA will allow a firm to manage its excessive leverage by restoring compliance with the expectation over a reasonable period of time. In exercising its judgement on what constitutes a reasonable time to manage excessive leverage and other potential supervisory action, the PRA will take into account the firm’s leverage ratio, the firms’ rationale for not meeting the expectation, the expected period over which the firm would not meet the expectation, the drivers of the excessive leverage, the context of the excessive leverage (whether firm-specific or systemic) and macroeconomic and financial conditions. If the PRA is not satisfied with the firm’s plan to reduce excessive leverage or with the firm’s reasons for not meeting the expectation it may consider using its powers under section 55M of FSMA to resolve the issue, including by requiring the firm to raise sufficient capital to meet the expectation within an appropriate timeframe.