• PRU 3.18 PRU 3.18 Countercyclical Capital Buffer

    • PRU 3.18.1 PRU 3.18.1

      This Section applies to an Authorised Person in Category 1, 2 or 5.

      • Guidance

        This Section is relevant to an Authorised Person that is required to report its Leverage Ratio to the Regulator under Chapter 2, or to disclose its Leverage Ratio under App 11.

        The purpose of the Leverage Ratio is to have a simple indicator that offers a safeguard against the risks associated with the risk models underpinning risk weighted assets (e.g. that the model is flawed or that data is measured incorrectly). The ultimate aim is also to constrain leverage and to bring institutions' assets more in line with their capital in order to help mitigate destabilising deleveraging processes in downturn situations.

    • PRU 3.18.2

      Where, pursuant to Section 3.4, the Risk Capital Requirement forms the Capital Requirement of an Authorised Person, then it is subject to a Countercyclical Capital Buffer requirement.

    • PRU 3.18.3 PRU 3.18.3

      (1) An Authorised Person must maintain the required buffer amount as CET1 Capital at all times, as calculated in accordance with Rule 3.18.4.
      (2) The Countercyclical Capital Buffer requirement applies on both a solo and a consolidated basis, for Authorised Persons forming part of Financial Groups.

      • Guidance

        1. The following Guidance is intended to illustrate how an Authorised Person should calculate its Leverage Ratio in accordance with this section.
        2. The Exposure Measure under Rule 3.18.3 should be calculated as the sum of:
        a. on-balance sheet items; and
        b. off-balance sheet items.
        3. In relation to on-balance sheet items:
        a. for SFTs, the Exposure value should be calculated in accordance with IFRS and the Netting requirements referred to in Rule 4.9.14;
        b. for Derivatives, including credit protection sold, the Exposure value should be calculated as the sum of the on-balance sheet value in accordance with IFRS and an add-on for potential future Exposure calculated in accordance with Rules A4.6.14 to A4.6.21 of App 4; and
        c. for other on-balance sheet items, the Exposure value should be calculated based on their balance sheet values in accordance with Rule 4.9.3.
        4. In relation to off-balance sheet items:
        a. for commitments that are unconditionally cancellable at any time by the Authorised Person without prior notice, the Exposure value should be the notional amount for the item multiplied by a CCF of 10%; and
        b. for other off-balance sheet items, including:
        i. direct credit substitutes;
        ii. certain transaction-related contingent items;
        iii. short-term self-liquidating trade-related contingent items and commitments to underwrite debt and equity Securities;
        iv. note issuance facilities and revolving Underwriting facilities;
        v. transactions, other than SFTs, involving the posting of Securities held by the Authorised Person as Collateral;
        vi. asset sales with recourse, where the Credit Risk remains with the Authorised Person;
        vii. other commitments with certain drawdown;
        viii. any other commitments; and
        ix. Unsettled Transactions,
        the Exposure value should be the notional amount for each of the items multiplied by a CCF of 100%.
        5. For an Islamic Financial Institution, assets corresponding to Unrestricted PSIAs will fall within the Exposure Measure and, therefore, are relevant to the Leverage Ratio calculation.

    • PRU 3.18.4

      An Authorised Person must calculate a Countercyclical Capital Buffer of CET1 Capital equal to its Total Risk Exposure Amount, calculated in accordance with Rule 3.5.7, multiplied by the weighted average of the Countercyclical Capital Buffer rates that apply to exposures in the jurisdictions where the Authorised Person's relevant credit exposures are located, calculated in accordance with Rules 3.18.5 to 3.18.8.

    • Relevant credit risk exposures

    • PRU 3.18.5

      Relevant credit risk exposures are those for which Credit RWAs have to be calculated in accordance with Chapter 4, other than those that fall into the following asset classes:

      (a) Central government and central bank.
      (b) Public sector enterprises.
      (c) Multilateral development bank (MDB).
      (d) International organisation.
      (e) Bank.

    • Guidance

      Exposures to banks with short-term credit assessments are not relevant credit risk exposures as they fall within the exempt asset class set out in Rule 3.18.5(e). However, exposures to non-bank entities with similar short-term credit assessments are relevant credit risk exposures for the purposes of Rule 3.18.5.

    • Weighted average of the Countercyclical Capital Buffer rates

    • PRU 3.18.6

      The weighted average of the Countercyclical Capital Buffer rates shall be calculated by:

      (a) for each jurisdiction in which the Authorised Person has relevant credit risk exposures, dividing the Total Risk Exposure Amount that relates to the relevant credit risk exposures in that jurisdiction by the Total Risk Exposure Amount that relates to the Authorised Person's relevant credit risk exposures across all jurisdictions and multiplying it by the applicable Countercyclical Capital Buffer rate in that jurisdiction; and
      (b) summing those contributions across all jurisdictions.

    • Geographical location

    • PRU 3.18.7

      For the purposes of the calculation of the weighted average of the applicable Countercyclical Capital Buffer rates an Authorised Person must identify, to the best of its ability, the geographical location of its relevant credit risk exposures as the jurisdiction where the underlying credit risk ultimately originates.

    • Countercyclical Capital Buffer rates

    • PRU 3.18.8

      (1) For a relevant credit risk exposure located in ADGM or the UAE:
      (a) the Countercyclical Capital Buffer rate is the rate set by the Central Bank from time to time, subject to a maximum rate of 2.5%; and
      (b) any increase in the Countercyclical Capital Buffer rate specified by the Central Bank takes effect from the date specified by the Central Bank.
      (2) For a relevant credit risk exposure located in a third country:
      (a) the Countercyclical Capital Buffer rate is:
      (i) the rate set by the authority responsible for setting the Countercyclical Capital Buffer rate in that third country from time to time; or
      (ii) 2.5% where the rate set by the third country rate setting authority exceeds 2.5%; or
      (iii) the rate set by the Central Bank where it sets a rate for a relevant credit exposure in the third country that exceeds that set by the third-country rate-setting authority, up to a maximum of 2.5%; or
      (iv) zero where the third country rate setting authority has not set a Countercyclical Capital Buffer rate for that jurisdiction and the Central Bank does not specify such a rate; and
      (b) any increase in the applicable Countercyclical Capital Buffer rate shall take effect from the date specified by the third country rate setting authority or the Central Bank, as appropriate;
      (3) Subject to (2)(a)(ii) and (iii) above for a relevant credit exposure in a third country, where a Countercyclical Capital Buffer rate for a jurisdiction is reduced that reduction shall take effect immediately.

    • Guidance

      An example of the calculation of the Countercyclical Capital Buffer follows, for an Authorised Person with relevant credit risk exposures in countries A, B and C of 60, 25 and 15 respectively, and where the applicable Countercyclical Capital Buffer rates are 2.0%, 1.0% and 1.5% respectively.

        Rule(s) A B C Total
      Countercyclical Capital Buffer rate
      - applicable
      3.18.8 2.0% 1.0% 1.5%  
      Relevant credit risk exposures 3.18.5 and 3.18.7 60 25 15 100
      Countercyclical Capital Buffer rate
      - weighted
      3.18.6 1.20% 0.25% 0.225% 1.675%
      Total Risk Exposure Amount 3.5.7(i) 100 60 40 200
      Countercyclical Capital Buffer 3.18.4       3.35

    • PRU 3.18.9

      Countercyclical Capital Buffer rates shall apply from the date set by the Central Bank or the third country rate-setting authority.