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PRA 110 is a tough regulatory return – can you keep up?

Paul Young Paul Young

The new PRA 110 Pillar 2 liquidity return is now live, but do you have the framework in place to produce it and can you replicate the results on a monthly basis – or sooner if required?

Greater regulatory oversight of liquidity risk

Applying to UK banks, building societies, PRA designated firms, and UK branches of EEA firms, the PRA 110 return helps the regulator to assess liquidity risk on a more granular basis than before. Larger firms, holding assets of €30 billion or above, must complete the return on a weekly basis, while smaller firms are expected to complete the return monthly. The PRA has made some changes to the return which will become effective from January 2020.

PRA 110 looks at short-term risks (less than 30 days), cash flow mismatches, liquidity cliffs, enhanced stress testing and benchmarking with peers. Specifically, it will help the PRA identify where:

  • the bank does not hold sufficient High Quality Liquid Assets to meet peak liquidity within the 30 day period
  • the bank may not be able to monetise sufficient non-cash HQLA to cover cumulative net outflows under the LCR stress on a daily basis
  • the bank may push maturity mismatches just beyond the 30 day horizon, resulting in a cliff risk.

Reassessing your processes and controls

The return is particularly complex and many banks have struggled to put the necessary measures in place to meet the first reporting deadline. Many firms have adopted a tactical approach to get them over the line, which has had distinct disadvantages for the following reasons:

  • manual and non-integrated processes tend to require highly experienced resources and the possibility of errors when populating up to 30,000 cells is high
  • the PRA 110 exercise doesn’t end at the report. It has considerable implications on how you account for your Pillar 2 liquidity risks and the nature of future scenarios.

But, once the basics are in place, you should reassess your processes (including controls), your Pillar 2 risks and your stress scenarios to make sure you can meet the reporting requirements on a long term basis.

Taking a strategic approach

You should undertake a gap analysis and put together a coherent strategy to complete the PRA 110 return regularly, this may include software solutions. The strategy should consider:

  • Cash-flow mismatch risks – insufficient liquidity to cover daily liquidity outflows:
    • Low point risk
    • HQLA monetisation risk
    • Cliff risk
    • FX mismatch risk
  • The stress test scenarios which will be needed:
    • Low point risk
    • Granular LCR stress scenario (30 day horizon)
    • Benchmark retail and wholesale stress scenarios (90 day horizon) addresses cliff risk
    • Granular LCR stress scenario (30 day horizon) and benchmark retail, wholesale and combined stress scenarios (90 day horizon) with monetisation profile
    • Enhanced retail stress (90 day horizon)
    • Enhanced wholesale stress (90 day horizon)
  • Similar metrics to the PRA:
    • Survival days
    • Net liquidity position under the combined benchmark stress scenarios and the combined benchmark stress scenarios
    • Peak cumulative net outflows and worst net liquidity position under LCR stress within 30 days, under each of the benchmark stresses within 90 days, under LCR stress scenario with monetisation profile within 30 days and the combined benchmark stress scenarios with monetisation profile within 90 days
    • Peak cumulative net outflows under the enhanced stress tools

We can help you implement an effective strategy around the PRA 110 return and Pillar 2, establishing processes to help you collect high quality information to meet your regulatory requirements. For further information, please contact Paul Young or Ian Morton.