The part of the Basel II Accord that sets out the process by which a bank should review its overall capital adequacy and the processes under which the supervisors evaluate how well financial institutions are assessing their risks and take appropriate actions in response to the assessments.
Pillar 2A is an assessment of additional capital to cover risks not adequately captured by Pillar 1 calculations. The supervisory Pillar 2A assessment (formerly Individual Capital Guidance) together with Pillar 1 capital comprise the Total Capital Requirement that a Bank must meet at all times.
Pillar 2B is a capital buffer (also called the PRA Buffer) that is intended to meet potential shortfalls in capital that may occur in the future due to adverse circumstances, such as an economic downturn.
The part of the Basel II Accord that sets out the disclosure requirements for banks to publish certain details of their risks, capital and risk management, with the aim of strengthening market discipline.
Point-in-Time - an internal rating system that assesses a counterparty's condition over the course of a specified time horizon, typically its probability of defaulting within one year.
The result of initiatives by banks to combine the results of their internal experience of losses, usually where only limited data is available to individual banks.
An amount of a firm’s capital that is held to absorb possible future losses and/or meet higher capital requirements in adverse circumstances, such as an economic downturn. The amount is based on the result of the firm’s stress test. The PRA Buffer, also called Pillar 2B capital, replaces the former Capital Planning Buffer and is off-set (reduced) by the Capital Conservation Buffer (and any Systemic buffers) where applicable.
The current worth of a future asset or cashflows that are discounted at an appropriate discount rate.
Proactive Intervention Framework
A regulatory intervention framework designed to ensure that the PRA identifies and responds to emerging risks at an early stage. As the PRA determines that a firm’s viability has deteriorated, the firm will be moved to a higher PIF stage and supervisory action will be taken accordingly.
Probability of Default
The probability that a counterparty will fail to meet their obligations under a contractual agreement.
Capital requirements tend to fluctuate with the business economic cycle, rising in a downturn. This increase leads to a further restricting of credit which in turn leads to still higher capital requirements, creating a self reinforcing economic behaviour known as pro-cyclicality.
These are liabilities where the company is uncertain as to the amount, or timing of the expected future costs.
Prudential Regulation Authority
The regulatory authority, a subsidiary of the Bank of England, that took over responsibility for the prudential regulation of UK banks from the FSA on 1 April 2013.
The exercise of caution e.g. prudential regulations are those which legislate capital and liquidity adequacy and other measures of restraint to maintain the safety and soundness of the banking system.
Quantitative Impact Study. For example, as carried out by regulators to gauge the impact of new proposals on banks affected.
That pertaining to the quality or nature of something, which is expressed descriptively.
Forms of lending that are unsecured, revolve (i.e. they do not represent a fixed amount for a fixed time, can be added to and reduced), and are uncommitted (i.e. able to be withdrawn at any time). An example would be a credit card or an overdraft facility.