"This consultation is a major step forward for the PRA in facilitating effective competition, reducing capital requirements for eligible small firms."
The PRA has refined its Pillar 2A capital framework to address the disparity in capital requirements between the Standardised Approach, mainly used by smaller banks and building societies, and the Internal Ratings Based Approach.
The Authority says these changes will help ensure its capital standards are not overly prudent for smaller firms, facilitating effective competition.
PRA supervisors will now be able to take into account the greater degree of conservatism that may apply to risk weights derived from the SA compared to those from IRB models for certain types of exposure – notably mortgages.
The PRA says the proposals should also "contribute to the safety and soundness of firms" by reducing incentives for SA lenders to specialise in higher LTV mortgages.
It also proposes to use the refined P2A approach to mitigate potential double counting of expected credit losses for SA firms under the new International Financial Reporting Standard 9 which will apply from 1 January 2018.
Sam Woods, Deputy Governor for Prudential Regulation said: "This consultation is a major step forward for the PRA in facilitating effective competition, reducing capital requirements for eligible small firms. This will be good for competition and for safety and soundness."
