PRA Warns Banks Against Use of Rule Loopholes

The PRA (Prudential Regulation Authority) has issued a statement warning UK banks against using their pension schemes to 'game the rules' to reduce the impact of capital requirements.

"We are aware that some PRA-regulated firms have conducted, or may be considering conducting, deficit reduction transactions with their defined benefit pension schemes that are structured to limit the regulatory capital impact that would otherwise result," the statement says.

The PRA said such tactics were legally risky, as well as "complex, artificial and opaque" in a way that "undermines the calibration of minimum regulatory capital requirements".

"We also draw firms'attention to the PRA's approach . Our policies should be followed 'in line with their spirit and intended outcome, not managing the business only to the letter, or gaming the rules'," the regulator added.

As reported, the warning is largely directed at Barclays, the only UK lender that used its pension scheme for capital arbitrage transactions in recent years.

In transactions done in 2019 and 2020, totalling GBP 1.25 billion, the trustees of Barclays Bank UK Retirement Fund were asked to invest in gilt-backed notes issued by a subsidiary "in order to manage the 'capital impact' of contributions".

The capital impact from a GBP 500 million contribution to the pension fund in 2019 was deferred to 2024, while that from a GBP 750 million contribution in 2020 was spread between 2023 and 2025.

Barclays could take a GBP 1.25 billion hit to its core capital buffer years earlier than planned, should the PRA demand that the transactions be unwound, the FT said. After tax, that is equivalent to a 30 basis point reduction from the bank's current 15.1 percent CET1 ratio.

Source: Regulation Asia