Prudential Regulation Authority Rulebook

1.1

This supervisory statement is relevant to all PRA-regulated banks, building societies, designated investment firms and all PRA-approved or PRA-designated holding companies and replaces PRA Supervisory Statement (SS) 5/13^[1] and SS6/13.^{[2] [3]}

1.2

It provides further detail in relation to the high-level expectations outlined in ‘The Prudential Regulation Authority’s approach to banking supervision’.^[4]

1.3

Chapter 2: ‘Expectations of firms undertaking an ICAAP’ sets out the expectations the PRA has in relation to the ICAAP and the requirements set out in the Internal Capital Adequacy Assessment (ICAA) Part of the PRA Rulebook. It sets out the PRA’s expectations regarding firms’ coverage and treatment of interest rate risk in the non-trading book (more commonly referred to as interest rate risk in the banking book or IRRBB), market risk, group risk, operational risk, pension obligation risk and foreign currency lending to unhedged retail and SME borrowers. It also provides additional detail on data that firms are required or expected to submit with their ICAAP document or otherwise as applicable.

1.4

Chapter 3: ‘Stress testing, scenario analysis and capital planning’ sets out the PRA’s expectations of firms in relation to stress testing, scenario analysis and capital planning, and the requirements set out in Chapter 12 of the Internal Capital Adequacy Assessment Part of the PRA Rulebook.

1.5

Chapter 4: ‘Reverse stress testing’ sets out the PRA’s expectations of firms in relation to reverse stress testing, and the requirements set out in Chapter 15 of the Internal Capital Adequacy Assessment Part of the PRA Rulebook.

1.6

Chapter 5: ‘The SREP’ sets out the factors that the PRA takes into consideration to assess a firm’s ICAAP. It explains the setting of firm specific capital requirements and the PRA buffer, the consequences in the event a firm fails to meet its Total Capital Requirement (TCR)^[5] or uses the PRA buffer, and disclosure. It also sets out the factors that the PRA takes into consideration to assess a firm’s reverse stress-testing approach including the PRA response to weaknesses in the process.

1.7

This supervisory statement should be read in conjunction with the Statement of Policy, ‘The PRA’s methodologies for setting Pillar 2 capital’.^[6] For ring-fenced bodies (RFBs), as defined in the Financial Services and Markets Act 2000 (FSMA), section 142A, and banking groups containing RFBs, this statement should be read alongside SS8/16, ‘Ring-fenced Bodies (RFBs)’.^[7]