Chapter 13 – Currency redenomination

Published on 30 November 2022

Overview

13.1 This chapter sets out the Prudential Regulation Authority’s (PRA) proposals to redenominate certain references to Euros (EUR) and US Dollars (USD) into Pound Sterling (GBP) in the PRA rules proposed in this Consultation Paper (CP).

13.2 The Capital Requirements Regulation (CRR) and the Basel 3.1 standards contain a number of thresholds and monetary values set in EUR. In transposing Capital Requirements Directive V (CRD V), the PRA redenominated EUR thresholds relating to the identification of material risk takers (MRTs) in the Remuneration Part of the PRA Rulebook.^{^{footnote [1]}} Subsequently, the PRA applied a consistent methodology when redenominating thresholds in respect of other regulatory changes.^{^{footnote [2]}}

13.3 The PRA proposes to continue applying this methodology to the proposals covered in this CP, specifying EUR thresholds and monetary values in GBP when implementing the Basel 3.1 standards, and in making PRA rules that cover material that is currently covered in the CRR.

13.4 Additionally, the PRA proposes a separate but similar, methodology to redenominate in GBP certain thresholds and monetary values in USD including those within CRR articles that are stated in EUR but based on a USD threshold in Basel standards.

13.5 The proposals in this chapter affect rules in the following proposed new or amended parts of the PRA Rulebook:

Credit Risk: Standardised Approach (CRR);
Credit Risk: Internal Ratings Based Approach (CRR);
Credit Risk Mitigation (CRR);
Market Risk: Advanced Standardised Approach (CRR);
Market Risk: General Provisions (CRR);
Market Risk: Internal Model Approach (CRR);
Operational Risk;
Credit Valuation Adjustment Risk; and
Reporting (CRR).

13.6 The proposals in this chapter are relevant to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial holding companies or mixed financial holding companies (‘firms’). The proposals would not apply to UK banks and building societies that meet the Simpler-regime criteria and choose to be subject to the Transitional Capital Regime proposals.^{footnote [3]}

Methodology and proposals

13.7 When redenominating thresholds and monetary values expressed in EUR in the Basel standards, the PRA proposes to use the same methodology to calculate the GBP/EUR exchange rate as that used in the implementation of other regulatory changes ie based on the average daily GBP/EUR spot exchange rate over a representative historical 12-month period. For consistency with the exchange rate used in other regulatory changes, the PRA proposes to use the average daily rate over the 12-month period prior to Friday 10 July 2020, rounded to two decimal places: £1 = €1.14. The PRA also proposes to round the redenominated GBP values to two significant figures.

13.8 In a small number of instances, the existing CRR provisions include EUR thresholds and monetary values that have been converted from USD-denominated thresholds in the Basel standards. Instead of converting from those EUR thresholds in the CRR, the PRA proposes to convert the thresholds direct from the USD value in the Basel standards and apply the average daily GBP/USD spot exchange rate covering the 12-month period prior to Friday 10 July 2020, rounded to two decimal places: £1 = $1.26. Other thresholds in the Basel standards in USD would also be converted using the same methodology.

13.9 The PRA considers that using the same exchange rate as that used in the implementation of other regulatory changes would mean that thresholds and monetary values are treated in a consistent manner to other PRA rules. The PRA intends to keep the proposed GBP/EUR and GBP/USD exchange rates applied under review. Based on the average daily spot exchange rates over the 12-month period prior to the end of the most recent calendar quarter before publication of final rules, if either of the resulting exchange rates differ from those set out above by 20% or more, the PRA proposes instead to use the relevant updated exchange rate.

13.10 For ease of reference, Tables 1, 2, 3, and 4 list the PRA rules for which the PRA proposes to set thresholds and monetary values in GBP, together with the proposed GBP value, assuming the rates set out in this chapter are applied.

Relevant PRA rule	Summary	EUR (€)	Proposed GBP (£)
Article 178(2)(da)(i) of the Credit Risk: Internal Ratings Based Approach (CRR) Part	Threshold for the total amounts past due, below which non-retail exposures are classified as ‘immaterial’ in the credit risk framework	500	440

Relevant PRA rule	Summary	EUR (€ million)	Proposed GBP (£ million)
Rule 1.2 Definition of ‘corporate SME’ in the Credit Risk: Standardised Approach (CRR) Part	Annual sales threshold for the consolidated group which a corporate SME is a part of, below which the exposure qualifies as a corporate SME in the credit risk SA framework	50	44
Article 123A(3) of the Credit Risk: Standardised Approach (CRR) Part	Threshold for maximum total exposure to one counterparty, below which exposures can qualify as Regulatory Retail exposures in the credit risk SA framework	1	0.88
Article 147(4E)(b)(ii) of the Credit Risk: Internal Ratings Based (IRB) Approach (CRR) Part	Annual revenues threshold for the consolidated group which a general corporate is a part of, above which advanced internal ratings based (AIRB) cannot be applied in the credit risk IRB framework (‘Large Corporates’)	500	440
Article 147(5)(a)(ii) of the Credit Risk: Internal Ratings Based Approach (CRR) Part	Threshold for maximum total exposure to one counterparty, below which exposures qualify for retail treatment in the credit risk IRB framework	1	0.88
Article 147(5A)(c) of Credit Risk: Internal Ratings Based Approach (CRR) Part	Threshold for the maximum exposure to a single individual in a sub-portfolio, below which exposures qualify as a revolving retail exposure in the credit risk IRB framework	0.1	0.09
Article 153(4) of the Credit Risk: Internal Ratings Based Approach (CRR) Part	Maximum annual sales threshold for the consolidated group which a corporate is a part of, to be used in the firm size adjustment in the corporate IRB formula^{footnote [4]} in the credit risk IRB framework	50	44
Article 153(4) of the Credit Risk: Internal Ratings Based Approach (CRR) Part	Minimum annual sales threshold for the consolidated group which a corporate is a part of, to be used in the firm size adjustment in the corporate IRB formula4 in the credit risk IRB framework	5	4.4
Article 208 (3)(b) of the Credit Risk Mitigation (CRR) Part	Threshold for exposure value of a loan, above which property valuations for that loan shall be reviewed at least every three years in the credit risk mitigation framework	3	2.6
Rule 7.1 (4) of the Operational Risk Part	The minimum threshold for including a loss event in the data collection in the operational risk framework	0.02	0.02
Article 446(1) of the Reporting (CRR) Part	The minimum threshold for including a loss event in the data collection in the operational risk framework	0.02	0.02
Article 356(1)(c) of the Market Risk: Simplified Standardised Approach (CRR) Part	Threshold for firms with agricultural commodities business, above which average own funds requirements for this risk cannot be exceeded in the market risk SA framework	1	0.88
Article 325a(1) of the Market Risk: General Provisions (CRR) Part	Threshold for on- and off-balance-sheet business that is subject to market risk, above which firms are not eligible to use the simplified standardised approach in the market risk SA framework	500	440

Relevant PRA rule	Summary	EUR (€ billion)	Proposed GBP (£ billion)
Rule 6.1(1) of the Credit Valuation Adjustment Risk Part	Threshold for aggregate notional amount of non-centrally cleared derivatives, below which firms may use the alternative approach in the CVA framework	100	88
Rule 5.8 of the Operational Risk Part	Business indicator threshold to determine if a firm’s marginal coefficient is in bucket 1 or 2 in the operational risk framework	1	0.88
Rule 5.8 of the Operational Risk Part	Business indicator threshold to determine if a firm’s marginal coefficient is in bucket 2 or 3 in the operational risk framework	30	26
Article 446(1) of the Reporting (CRR) Part	Business indicator threshold above which firms must disclose loss events in the operational risk framework	1	0.88

Relevant PRA rule	Summary	USD ($ billion)	Proposed GBP (£ billion)
Article 142(4)(a) of the Credit Risk: Internal Ratings Based Approach (CRR) Part	Threshold for total assets of a financial sector entity (or its parent company), above which it is classified as a large financial sector entity in the credit risk IRB framework	100	79
Rule 5.28(1) of the Credit Valuation Adjustment Risk Part	Threshold for market capitalisation of equities, above which they are considered as large cap equities in the CVA framework	2	1.6
Article 325i (3)(e) of the Market Risk: Advanced Standardised Approach (CRR) Part	Threshold for market capitalisation of all the constituents of the listed index, above which firms are eligible to use a look-through approach in the market risk SA framework	40	32
Article 325BD(9) of the Market Risk: Internal Model Approach (CRR) Part	Threshold for market capitalisation of equities, above which they are considered as large cap equities in the market risk advanced SA and IMA framework	2	1.6

PRA objectives analysis

13.11 The PRA considers that it is appropriate for PRA rules to specify thresholds and monetary values in GBP. The PRA considers that its proposals would provide a methodology that would maintain the relative sizes of thresholds and monetary values set out in the Basel 3.1 standards after redenomination. Specifying values in GBP would reduce the extent to which variations in the GBP/EUR or GBP/USD exchange rates require immediate changes in the requirements applicable to firms. The PRA considers that this would reduce the risk of inconsistency in the application of the prudential framework and therefore supports the PRA’s primary objective of promoting the safety and soundness of firms.

‘Have regards’ analysis

13.12 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT recommendation letter from 2021 and the supplementary recommendation letter sent April 2022. Where the proposed new rules are CRR rules (as defined in section 144A of FSMA), the PRA has also taken into consideration the matters to which it is required to have regard when proposing changes to CRR rules. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals:

1. Relevant international standards (FSMA CRR rules):

The PRA considers that its proposed methodology for converting the thresholds stated in international standards is designed to align with such standards.

2. Proportionality (FSMA regulatory principles):

The PRA considers that the proposals set out in this chapter also support the proportionality of the prudential framework. The specification of thresholds and monetary values in GBP would reduce the extent of change in requirements applicable to firms that result from variations in exchange rates.

PRA Policy Statement 29/20 – ‘Capital Requirements Directive V (CRD V): Final policy’, December 2020.
This includes the PRA Policy Statement 22/21 – ‘Implementation of Basel standards: Final rules’, October 2021 and the PRA Policy Statement 21/21 – ‘The UK leverage ratio framework’, October 2021.
Chapter 2 – Scope and levels of application also describes the position for PRA-designated financial holding companies or mixed financial holding companies related to those UK banks and building societies.
For the purposes of calculating the coefficient of correlation, R, in the IRB formula for corporates in Article 153(4) of the Credit Risk: Internal Ratings Based Approach (CRR) Part, the PRA proposes to replace values in the formula to the GBP converted values as set out. The PRA also proposes to calculate the difference between these converted thresholds, 39.6, and substitute this for 45 in the calculation.