Barclays 2014 Annual Report Download - page 217

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Supervision of the Group
The Group’s operations, including its overseas offices, subsidiaries and
associates, are subject to a significant body of rules and regulations
that are a condition for authorisation to conduct banking and financial
services business. These apply to business operations, affect financial
returns, include reserve and reporting requirements, and prudential and
conduct of business regulations. These requirements are set by the
relevant central banks and regulatory authorities that authorise,
regulate and supervise the Group in the jurisdictions in which it
operates. The requirements reflect global standards developed by,
amongst others, the Basel Committee on Banking Supervision and the
International Organization of Securities Commissions. They also reflect
requirements imposed directly by, or derived from, EU legislation.
In the UK, the Bank of England has responsibility for monitoring the UK
financial system as a whole. The day-to-day regulation and supervision
of the Group is divided between the Prudential Regulation Authority
(PRA) – which is established as part of the Bank of England – and the
Financial Conduct Authority (FCA).
In addition, the Financial Policy Committee (FPC) of the Bank of
England has significant influence on the prudential requirements that
may be imposed on the banking system through powers of direction
and recommendation. The FPC has direction powers over sectoral
capital requirements which it can set in relation to exposures to specific
sectors judged to pose a risk to the financial system as a whole. The
government has also proposed to make the FPC responsible for the
Basel III countercyclical capital buffer, introduced in the EU under the
Capital Requirements Directive and Regulation (collectively known as
CRD IV).
The Financial Services and Markets Act 2000 (as amended)(FSMA)
remains the principal statute under which financial institutions are
regulated in the UK. Barclays Bank PLC is authorised under FSMA to
carry on a range of regulated activities within the UK. It is also
authorised and subject to solo and consolidated prudential supervision
by the PRA and subject to conduct regulation and supervision by the
FCA.
In its role as supervisor, the PRA seeks to maintain the safety and
soundness of financial institutions with the aim of strengthening, but
not guaranteeing, the protection of customers and the financial
system. The PRA’s continuing supervision of financial institutions is
conducted through a variety of regulatory tools, including the
collection of information by way of prudential returns, reports obtained
from skilled persons, visits to firms and regular meetings with
management to discuss issues such as performance, risk management
and strategy.
The regulation and supervision of conduct matters is the responsibility
of the FCA. FCA regulation of the Group is carried out through a
combination of continuous assessment over rolling two-year periods;
regular thematic and project work based on the FCA’s sector
assessments, which analyse the different areas of the market and the
risks that may lie ahead; and responding to crystallised risks, seeking to
ensure remediation as appropriate.
Global regulatory developments
The regulatory change generated by the financial crisis is having and
will continue to have a substantial impact on all financial institutions.
Regulatory change is being pursued at a number of levels; globally
notably through the G20, Financial Stability Board (FSB) and Basel
Committee on Banking Supervision (BCBS), regionally through the
European Union and nationally, especially in the UK and US. Further
changes to prudential requirements and further refinements to the
definitions of capital and liquid assets may affect the Group’s planned
activities and could increase costs and contribute to adverse impacts
on the Group’s earnings. Similarly, increased requirements in relation to
capital markets activities and to market conduct requirements may
affect the Group’s planned activities and could increase costs and
thereby contribute to adverse impacts on the Group’s earnings.
The programme of reform of the global regulatory framework that was
agreed by G20 Heads of Government in April 2009 has continued to be
taken forward during 2014.
The FSB has been designated by the G20 as the body responsible for
co-ordinating the delivery of the global reform programme in relation
to the financial services industry. It has focused particularly on the risks
posed by systemically important financial institutions. In 2011, G20
Heads of Government adopted FSB proposals to reform the regulation
of globally systematically important financial institutions (G-SIFIs). A
key element of this programme is that G-SIFIs should be capable of
being resolved without recourse to taxpayer support. Barclays has been
designated a G-SIFI by the FSB. G-SIFIs will be subject to a number of
requirements, including additional loss absorption capacity above that
required by Basel III standards (see below). The surcharges rise in
increments from 1% to 2.5% of risk-weighted assets (with an empty
category of 3.5% for institutions that increase the extent of the
systemic risk they pose which is intended to discourage institutions
from developing their business in a way that heightens their systemic
nature). This additional buffer must be met with common equity.
In its November 2014 list of G-SIFIs, the FSB confirmed Barclays
position in a category that will require it to meet a 2% surcharge. The
additional loss absorbency requirements will apply to those financial
institutions identified in November 2014 as globally systemically
important and will be phased in starting from January 2016, with full
implementation by January 2019. G-SIFIs must also meet the higher
supervisory expectations for data aggregation capabilities by January
2016. In the EU the requirements for a systemic risk buffer will be
implemented through the CRD.
The BCBS issued the final guidelines on Basel III capital and liquidity
standards in June 2011, with revisions to counterparty credit risk in July
and November 2011. Regulatory liquidity revisions were agreed in
January 2013 to the definitions of high quality liquid assets and net
cash outflows for the purpose of calculating the Liquidity Coverage
Ratio, as well as establishing a timetable for phasing-in the standard
from January 2016. Amendments to the Basel III leverage ratio and
liquidity frameworks were issued in January 2014. The requirements of
Basel III as a whole are subject to a number of transitional provisions
that run to the end of 2018. The Group is, however, primarily subject to
the EU’s implementation of the Basel III standard through CRD IV (see
below).
The BCBS also maintains a number of active workstreams that will
affect the Group. These include a fundamental review of the trading
book where a second consultation on enhanced capital standards was
issued in October 2013 and further work on large exposures. The
Committee also continues to focus on the consistency of risk weighting
of assets and explaining the variations between banks. The final
standard for measuring and controlling large exposures were published
by the Basel Committee in April 2014 to take effect in 2019. Also in April
2014, the Basel Committee published the final standard for calculating
regulatory capital for banks’ exposure to central counterparties (CCPs).
In conjunction with the International Organization of Securities
Commissions, the BCBS issued enhanced standards for margin
requirements for non-centrally cleared derivatives in September 2013.
The BCBS also issued risk management guidelines related to anti-
money laundering and terrorist financing in January 2014. In October
2014, the BCBS published a consultation on a revised standardised
approach for measuring operational risk.
In November 2014 the FSB issued a consultative document which set
out its proposals to enhance the loss-absorbing capacity of global
systemically important banks (GSIBs), such that there is sufficient loss
absorbing and recapitalisation capacity available in resolution to
implement an orderly resolution which minimises the impact on
financial stability, ensures the continuity of critical functions and avoids
exposing taxpayers to losses. The FSB proposes to achieve this by
setting a new minimum requirement for “total loss absorbing capacity”
(TLAC). A specific minimum amount of TLAC of between 16% and
20% of a GSIB’s risk-weighted assets and at least twice the Basel III Tier
1 leverage ratio would have to be met. The proposal states that GSIBs
will not be expected to meet TLAC requirements before 1 January 2019.
Comments on the consultative document were due in February 2015,
and the FSB is expected to finalize its proposal in 2015.
Supervision and regulation
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