BoE PRA's ICAAP and SREP - Key Takeaways and Implications to the Banks

Bank of England (BoE) Prudential Regulation Authority's (PRA) Feb 2025 supervisory statement (SS) following PS 2/25 outlines the expectations and requirements for banks and financial institutions regarding the Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review Evaluation Process (SREP).

The updated Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) will be effective from 31 March 2025.

Relationship between SREP and ICAAP

The relationship between the Supervisory Review and Evaluation Process (SREP) and the Internal Capital Adequacy Assessment Process (ICAAP) is integral to the regulatory framework for ensuring that firms maintain adequate capital to cover their risks. The ICAAP and SREP are closely related processes that work together to ensure that firms maintain adequate capital to cover their risks. The ICAAP is the firm's internal assessment of its capital needs, while the SREP is the PRA's external review and evaluation of the firm's ICAAP. Together, they form a comprehensive framework for risk management and capital adequacy.

1. Purpose and Objectives:

? ?- ICAAP: The ICAAP is a process conducted by firms to assess their capital adequacy in relation to their risk profile. It involves identifying, measuring, and managing risks, and determining the amount and quality of capital needed to cover these risks.

? ?- SREP: The SREP is conducted by the Prudential Regulation Authority (PRA) to review and evaluate the ICAAP submitted by firms. The SREP ensures that the firm's assessment of its capital needs is accurate and that the firm holds sufficient capital to cover its risks.

2. Assessment and Review:

? ?- ICAAP: Firms are required to document their ICAAP, which includes detailed assessments of their risk exposures, capital requirements, and the adequacy of their risk management frameworks. The ICAAP should be updated regularly to reflect changes in the firm's risk profile and operating environment.

? ?- SREP: The PRA reviews the ICAAP as part of the SREP. This review includes evaluating the methodologies and assumptions used by the firm, the comprehensiveness of the risk assessment, and the adequacy of the capital held by the firm. The SREP also involves discussions with the firm's management to understand and challenge the ICAAP findings.

3. Setting Capital Requirements:

? ?- ICAAP: Based on its risk assessment, a firm determines its internal capital requirements and documents these in the ICAAP. This includes both Pillar 1 capital (minimum regulatory capital) and Pillar 2 capital (additional capital for risks not fully captured under Pillar 1).

? ?- SREP: The PRA uses the SREP to validate the firm's ICAAP and to set Pillar 2A capital requirements. The PRA may adjust the firm's capital requirements based on its own assessment of the firm's risks and the adequacy of its capital. The SREP also determines the PRA buffer, which is additional capital to cover potential adverse scenarios.

4. Risk Management and Governance:

? ?- ICAAP: The ICAAP requires firms to have robust risk management and governance frameworks in place to identify, measure, and manage risks effectively. The ICAAP should be integrated into the firm's overall management processes and decision-making.

? ?- SREP: The SREP evaluates the effectiveness of the firm's risk management and governance frameworks. The PRA assesses whether the firm's management body is actively involved in the ICAAP and whether the firm's internal controls and risk management practices are adequate.

5. Stress Testing and Scenario Analysis:

? ?- ICAAP: Firms are required to conduct stress testing and scenario analysis as part of the ICAAP to assess their resilience to adverse conditions and to determine the impact on their capital position.

? ?- SREP: The PRA reviews the results of the firm's stress tests and scenario analyses during the SREP. This helps the PRA to assess the firm's ability to withstand adverse conditions and to determine whether the firm's capital levels are sufficient.

6. Ongoing Monitoring and Supervisory Actions:

? ?- ICAAP: Firms must continuously monitor their risk exposures and capital adequacy, updating the ICAAP as necessary to reflect changes in their risk profile and operating environment.

? ?- SREP: The SREP is an ongoing process that involves regular monitoring of the firm's risk profile and capital adequacy. Based on the findings of the SREP, the PRA may require the firm to take corrective actions to address any identified weaknesses or risks.

Understanding ICAAP - Key Components and Supervisory Expectations

ICAAP - Key Components

The key components of the ICAAP (Internal Capital Adequacy Assessment Process) include:

1. Risk Identification and Assessment:

? ?- Identify all major sources of risk, including credit risk, market risk, operational risk, interest rate risk in the banking book (IRRBB), liquidity risk, group risk, pension obligation risk, and foreign currency lending risk to unhedged retail and SME borrowers.

? ?- Assess the nature, scale, and complexity of these risks.

2. Capital Adequacy Assessment:

? ?- Determine the amounts, types, and distribution of capital required to cover the identified risks.

? ?- Ensure that the capital is adequate to absorb potential losses and meet liabilities as they fall due.

3. Stress Testing and Scenario Analysis:

? ?- Develop and implement a framework for stress testing and scenario analysis.

? ?- Conduct stress tests and scenario analyses to evaluate the impact of severe but plausible adverse conditions on the firm's financial position.

? ?- Use the results to inform capital planning and risk management.

4. Governance and Oversight:

? ?- Ensure that the ICAAP is the responsibility of the firm's management body.

? ?- Obtain approval from the management body and integrate the ICAAP into the firm's management processes and decision-making.

? ?- Regularly review the adequacy of the firm's financial resources and take necessary actions based on the ICAAP results.

5. Documentation and Reporting:

? ?- Document the ICAAP process, including methodologies, assumptions, and results.

? ?- Update the ICAAP at least annually or more frequently if significant changes occur in the business, strategy, or operational environment.

? ?- Maintain records of the ICAAP assessments and decisions.

6. Proportionality:

? ?- Ensure that the ICAAP and its supporting processes and systems are proportionate to the nature, scale, and complexity of the firm's activities.

7. Liquidity Risk Assessment:

? ?- Assess liquidity risk, including potential losses from asset liquidation and increased funding costs during stress periods.

? ?- Ensure that the firm has adequate liquidity to meet its obligations under stressed conditions.

8. Model Use and Validation:

? ?- If using models to aid in the assessment of capital adequacy, ensure that the models are appropriately conservative and contribute to prudent risk management.

? ?- Validate the models' structure, parameterization, and governance, and ensure the firm has the necessary expertise to operate and maintain them.

9. Management Actions and Contingency Plans:

? ?- Identify realistic management actions that could be taken to mitigate adverse effects of stress scenarios.

? ?- Develop contingency plans and risk mitigation steps to address potential capital shortfalls or increased risks.

10. Credit Risk Mitigation:

? ? - Assess the effectiveness of guarantees qualifying as unfunded credit protection and consider potential risks that could render the credit protection ineffective.

ICAAP - Supervisory Expectations

The key expectations for firms undertaking an Internal Capital Adequacy Assessment Process (ICAAP) are as outlined below:

1. Ongoing Assessment: Firms must continuously assess the amounts, types, and distribution of capital needed to cover the level and nature of risks they face. This includes incorporating stress testing and scenario analysis.

2. Management Responsibility: The ICAAP should be the responsibility of the firm's management body, approved by them, and integrated into the firm's management processes and decision-making.

3. Proportionality: The ICAAP and its supporting processes and systems should be proportionate to the nature, scale, and complexity of the firm's activities.

4. Documentation and Updates: The ICAAP should be documented and updated annually, or more frequently if significant changes occur in the business, strategy, or operational environment.

5. Risk Coverage: The ICAAP should cover major sources of risk, including interest rate risk in the banking book (IRRBB), market risk, group risk, operational risk, pension obligation risk, and foreign currency lending to unhedged retail and SME borrowers.

6. Liquidity Risk: Firms should assess liquidity risk, including potential losses from asset liquidation and increased funding costs during stress periods.

7. Stress Testing Framework: Firms are expected to develop a framework for stress testing, scenario analysis, and capital management that captures the full range of risks and assesses them against severe scenarios.

8. Model Use: If firms use models to aid in capital adequacy assessment, these models should be conservative, contribute to prudent risk management, and be subject to PRA scrutiny.

9. Credit Risk Mitigation: Firms using the Standardised Approach for credit risk should assess the effectiveness of guarantees qualifying as unfunded credit protection and consider potential risks that could render the credit protection ineffective.

10. Interest Rate Risk Management: Firms must have appropriate systems and processes to identify, evaluate, and manage IRRBB, including small trading book business and scenarios where economic value of equity (EVE) declines significantly.

How Should Firms Document their ICAAP processes?

Firms should document their ICAAP processes comprehensively and systematically. By thoroughly documenting these elements, firms can ensure that their ICAAP processes are transparent, well-understood, and effectively integrated into their overall risk management framework.

1. Assessment of Capital Adequacy:

? ?- Detailed description of the methodologies and assumptions used to assess the adequacy of capital.

? ?- Explanation of how the firm determines the amounts, types, and distribution of capital needed to cover its risks.

2. Risk Identification and Measurement:

? ?- Identification of all major sources of risk, including interest rate risk in the banking book (IRRBB), market risk, group risk, operational risk, pension obligation risk, and foreign currency lending to unhedged retail and SME borrowers.

? ?- Methods and processes used to measure and manage these risks.

3. Stress Testing and Scenario Analysis:

? ?- Framework for stress testing and scenario analysis, including the range of scenarios considered and the rationale for their selection.

? ?- Results of stress tests and scenario analyses, and how these results inform capital planning and risk management.

4. Governance and Management Oversight:

? ?- Roles and responsibilities of the management body and senior management in the ICAAP process.

? ?- Approval process for the ICAAP by the management body and its integration into the firm's management processes and decision-making.

5. Proportionality and Frequency of Updates:

? ?- Explanation of how the ICAAP is proportionate to the nature, scale, and complexity of the firm's activities.

? ?- Schedule for regular updates to the ICAAP, at least annually, or more frequently if significant changes occur in the business, strategy, or operational environment.

6. Liquidity Risk Assessment:

? ?- Assessment of liquidity risk, including potential losses from asset liquidation and increased funding costs during stress periods.

? ?- Reference to relevant PRA policy statements, such as PS11/15 for liquidity risk.

7. Model Use and Validation:

? ?- Description of any models used to aid in the assessment of capital adequacy, including their structure, parameterization, and governance.

? ?- Evidence of the firm's understanding of the models' attributes, outputs, and limitations, and the skills and expertise to operate, maintain, and develop the models.

8. Credit Risk Mitigation:

? ?- Assessment of the effectiveness of guarantees qualifying as unfunded credit protection and consideration of potential risks that could render the credit protection ineffective.

9. Interest Rate Risk Management:

? ?- Systems and processes for identifying, evaluating, and managing IRRBB.

? ?- Documentation of the firm's approach to managing small trading book business and scenarios where the economic value of equity (EVE) declines significantly.

10. Management Actions and Contingency Plans:

? ? - Identification of realistic management actions that could be taken to mitigate adverse effects of stress scenarios.

? ? - Contingency plans and risk mitigation steps to address potential capital shortfalls or increased risks.

Stress Testing

Role of stress testing in assessing the firms capital needs and how to document stress testing results?

Stress testing is integral to capital planning as it helps firms quantify potential losses, assess capital needs, inform capital allocation, support risk management, guide strategic decisions, ensure regulatory compliance, enhance financial stability, and develop management actions and contingency plans.

Firms can assess capital needs through stress testing by following a structured approach that involves several key steps:

1. Identify Relevant Scenarios:

? ?- Develop a range of stress scenarios that are relevant to the firm's business model, risk profile, and market environment. These scenarios should include both historical and hypothetical events that could significantly impact the firm's financial position.

2. Define Parameters and Assumptions:

? ?- Establish the parameters and assumptions for each stress scenario. This includes defining the severity and duration of the stress events, as well as any specific conditions that could affect the firm's operations, such as changes in interest rates, credit spreads, or market liquidity.

3. Quantify Potential Impacts:

? ?- Use quantitative models to estimate the impact of each stress scenario on the firm's financial metrics, such as capital adequacy, liquidity, profitability, and asset quality. This involves calculating potential losses, changes in risk-weighted assets, and the effect on regulatory capital ratios.

4. Evaluate Capital Adequacy:

? ?- Assess the firm's capital adequacy under each stress scenario by comparing the projected capital levels to regulatory requirements and internal capital targets. This helps determine whether the firm has sufficient capital to absorb losses and continue operating under adverse conditions.

5. Incorporate Management Actions:

? ?- Identify and evaluate potential management actions that could mitigate the impact of stress scenarios. These actions might include raising additional capital, reducing risk exposures, adjusting business strategies, or implementing cost-saving measures. Assess the feasibility and effectiveness of these actions in the context of the stress scenarios.

6. Project Future Capital Needs:

? ?- Project the firm's capital needs over a multi-year horizon, typically three to five years, taking into account the impact of stress scenarios on future capital requirements. This involves forecasting the firm's capital resources and capital demands, considering both baseline and stressed conditions.

7. Conduct Sensitivity Analysis:

? ?- Perform sensitivity analysis to understand how changes in key assumptions or parameters affect the stress testing results. This helps identify the most critical risk factors and assess the robustness of the capital adequacy assessment.

8. Document and Report Results:

? ?- Document the stress testing process, including the scenarios, assumptions, methodologies, and results. Prepare comprehensive reports that summarize the findings and provide insights into the firm's capital needs under stress conditions. These reports should be communicated to senior management, the board of directors, and regulators.

9. Review and Update Regularly:

? ?- Regularly review and update the stress testing framework to reflect changes in the firm's risk profile, business environment, and regulatory requirements. This ensures that the stress testing process remains relevant and effective in assessing capital needs.

10. Integrate with ICAAP:

? ? - Integrate the stress testing results into the firm's Internal Capital Adequacy Assessment Process (ICAAP). This helps demonstrate how stress testing informs the firm's capital planning and risk management decisions, ensuring that the firm maintains adequate capital to cover its risks.

How can firm's document stress testing results?

Firms can document their stress testing results as part of their Internal Capital Adequacy Assessment Process (ICAAP) by following these steps:

1. Detailed Methodology:

? ?- Document the methodologies used for stress testing, including the assumptions, parameters, and models applied. This includes specifying the types of stress tests conducted (e.g., sensitivity analysis, scenario analysis) and the rationale behind the chosen scenarios.

2. Scenario Descriptions:

? ?- Provide detailed descriptions of the stress scenarios used, including the economic, financial, and operational conditions simulated. This should cover both historical and hypothetical scenarios, as well as any reverse stress testing conducted.

3. Quantitative Results:

? ?- Present the quantitative results of the stress tests, showing the impact on the firm's financial position, including capital adequacy, liquidity, and profitability. This includes the projected changes in key financial metrics under each stress scenario.

4. Impact Analysis:

? ?- Analyze the impact of stress scenarios on different risk areas, such as credit risk, market risk, operational risk, and liquidity risk. This should include a breakdown of how each risk type contributes to the overall impact on the firm's capital and financial stability.

5. Management Actions:

? ?- Document any realistic management actions that the firm could take to mitigate the adverse effects of the stress scenarios. This includes detailing the feasibility, timing, and expected effectiveness of these actions.

6. Comparative Analysis:

? ?- Compare the stress testing results with the firm's baseline projections and historical performance. Highlight any significant deviations and explain the reasons behind them.

7. Governance and Oversight:

? ?- Include information on the governance and oversight of the stress testing process. This should cover the involvement of the firm's management body, the approval process, and any reviews or challenges conducted by internal or external parties.

8. Documentation of Assumptions:

? ?- Clearly document the key assumptions used in the stress testing process, such as behavioral assumptions, market conditions, and macroeconomic factors. Explain how these assumptions were derived and their relevance to the firm's risk profile.

9. Sensitivity Analysis:

? ?- Provide sensitivity analysis results to show how changes in key assumptions or parameters affect the stress testing outcomes. This helps to understand the robustness of the results and identify critical risk factors.

10. Reporting and Communication:

? ? - Prepare comprehensive reports summarizing the stress testing results, methodologies, and impact analysis. These reports should be communicated to relevant stakeholders, including the firm's management body, regulators, and auditors.

11. Regular Updates:

? ? - Ensure that the stress testing documentation is regularly updated to reflect any changes in the firm's risk profile, business environment, or regulatory requirements. This includes updating the scenarios, methodologies, and results as needed.

12. Integration with ICAAP:

? ? - Integrate the stress testing results into the ICAAP document, providing a clear link between the stress testing outcomes and the firm's capital adequacy assessment. This helps to demonstrate how stress testing informs the firm's capital planning and risk management decisions.

SREP - How does the PRA evaluate the firm's risk management framework?

The Prudential Regulation Authority (PRA) evaluates a firm's risk management framework as part of the Supervisory Review and Evaluation Process (SREP). The evaluation focuses on several key aspects to ensure that the firm's risk management practices are robust, comprehensive, and effective.

The PRA's evaluation of a firm's risk management framework is comprehensive and multifaceted, focusing on governance, risk appetite, risk identification and assessment, risk measurement and monitoring, risk control and mitigation, stress testing, internal audit, and risk culture. The goal is to ensure that the firm's risk management practices are effective in identifying, assessing, managing, and mitigating risks, thereby promoting the stability and resilience of the financial system

Here are the main components of the PRA's evaluation:

1. Governance and Oversight:

? ?- The PRA assesses the involvement and engagement of the firm's management body (e.g., board of directors) in the risk management process. This includes evaluating whether the management body is actively involved in establishing the risk management framework, reviewing its implementation, and taking action based on risk assessments.

? ?- The PRA examines the firm's governance structure to ensure that there are clear lines of responsibility and accountability for risk management. This includes assessing the roles and responsibilities of senior management and risk committees.

2. Risk Appetite and Strategy:

? ?- The PRA evaluates the firm's risk appetite statement, which defines the level and types of risk the firm is willing to take in pursuit of its business objectives. The PRA assesses whether the risk appetite is clearly articulated, communicated, and aligned with the firm's overall strategy.

? ?- The PRA reviews how the firm's risk appetite is integrated into its decision-making processes and whether it is regularly reviewed and updated to reflect changes in the firm's risk profile and operating environment.

3. Risk Identification and Assessment:

? ?- The PRA assesses the firm's processes for identifying and assessing risks across all areas of its operations. This includes evaluating the comprehensiveness of the risk identification process and the methodologies used to assess the significance and potential impact of identified risks.

? ?- The PRA examines whether the firm has a systematic approach to identifying emerging risks and whether it considers a wide range of risk factors, including economic, financial, operational, legal, and regulatory risks.

4. Risk Measurement and Monitoring:

? ?- The PRA evaluates the firm's risk measurement systems and tools to ensure they are appropriate for the nature, scale, and complexity of the firm's activities. This includes assessing the accuracy, reliability, and timeliness of risk data and metrics.

? ?- The PRA reviews the firm's risk monitoring processes to ensure that risks are continuously tracked and reported to the management body and relevant risk committees. This includes assessing the frequency and quality of risk reporting.

5. Risk Control and Mitigation:

? ?- The PRA assesses the effectiveness of the firm's risk control and mitigation measures. This includes evaluating the adequacy of internal controls, policies, and procedures designed to manage and mitigate identified risks.

? ?- The PRA examines whether the firm has appropriate risk limits and thresholds in place and whether these limits are regularly reviewed and enforced. The PRA also assesses the firm's contingency plans and risk mitigation strategies.

6. Stress Testing and Scenario Analysis:

? ?- The PRA evaluates the firm's stress testing and scenario analysis framework to ensure it is robust and comprehensive. This includes assessing the range of stress scenarios considered, the methodologies used, and the integration of stress testing results into the firm's risk management and capital planning processes.

? ?- The PRA reviews how the firm uses stress testing and scenario analysis to identify vulnerabilities, assess capital adequacy, and develop contingency plans.

7. Internal Audit and Independent Review:

? ?- The PRA assesses the role of the firm's internal audit function in providing independent assurance on the effectiveness of the risk management framework. This includes evaluating the scope, frequency, and quality of internal audits related to risk management.

? ?- The PRA examines whether the firm conducts regular independent reviews of its risk management framework and whether the findings of these reviews are addressed and acted upon.

8. Risk Culture and Values:

? ?- The PRA evaluates the firm's risk culture to ensure that it promotes prudent risk-taking and effective risk management. This includes assessing the firm's efforts to embed a strong risk culture throughout the organization, including training, communication, and incentives.

? ?- The PRA reviews whether the firm's risk culture aligns with its stated values and whether there is a consistent understanding and commitment to risk management across all levels of the organization

What actions PRA can take based on SREP findings?

Based on the findings of the Supervisory Review and Evaluation Process (SREP), the Prudential Regulation Authority (PRA) can take several actions to ensure that firms maintain adequate capital and manage their risks effectively and comply with regulatory requirements. These actions help to promote the stability and resilience of the financial system

1. Setting Pillar 2A Capital Requirements:

? ?- The PRA can set specific Pillar 2A capital requirements for a firm, which are additional to the minimum regulatory capital requirements (Pillar 1). These requirements are designed to cover risks that are not fully captured under Pillar 1, such as interest rate risk in the banking book (IRRBB) and concentration risk.

2. Setting the PRA Buffer:

? ?- The PRA can establish a PRA buffer, which is additional capital that a firm should hold over and above its Total Capital Requirement (TCR) and CRD buffers. The PRA buffer is intended to ensure that the firm can continue to meet its capital requirements under adverse conditions.

3. Requiring Management Actions:

? ?- If the SREP identifies weaknesses in a firm's risk management or governance, the PRA can require the firm to take specific management actions to address these weaknesses. This may include improving internal controls, enhancing risk management practices, or making changes to the firm's governance structure.

4. Requiring Additional Stress Testing and Scenario Analysis:

? ?- The PRA can require a firm to conduct additional stress testing and scenario analysis to better understand its vulnerabilities and the potential impact of adverse conditions on its capital position. This helps ensure that the firm is adequately prepared for potential risks.

5. Requiring Capital Restoration Plans:

? ?- If a firm's capital falls below its TCR or if it needs to use its PRA buffer, the PRA can require the firm to prepare and implement a capital restoration plan. This plan should outline the actions the firm will take to restore its capital levels within an appropriate timeframe.

6. Imposing Restrictions or Conditions:

? ?- The PRA can impose restrictions or conditions on a firm's operations if the SREP identifies significant risks or weaknesses. This may include limiting certain business activities, restricting dividend payments, or requiring the firm to hold additional capital.

7. Enhanced Supervisory Actions:

? ?- The PRA can take enhanced supervisory actions if a firm does not meet its PRA buffer or if there are significant concerns about the firm's risk management or capital adequacy. Enhanced supervisory actions may include more frequent monitoring, additional reporting requirements, or on-site inspections.

8. Using Section 55M Powers:

? ?- If a firm does not agree with the PRA's assessment of its capital requirements or if the firm fails to take appropriate actions, the PRA can use its powers under section 55M of the Financial Services and Markets Act 2000 (FSMA) to impose capital requirements or other measures on the firm.

9. Addressing Money Laundering and Terrorist Financing Risks:

? ?- If the PRA has reasonable grounds to suspect that money laundering or terrorist financing is being undertaken, or there is an increased risk thereof, the PRA can take appropriate steps to address these risks. This may include requiring the firm to enhance its anti-money laundering (AML) and counter-terrorist financing (CTF) controls.

10. Disclosure Requirements:

? ? - The PRA can require firms to disclose their SREP feedback letters, including Pillar 2A capital requirements and the PRA buffer, to their auditors. The PRA also expects firms to publicly disclose the amount and quality of their TCR at the highest level of consolidation in the UK.

PRA's approach to assessing the firm's Pillar 2A risks

The Prudential Regulation Authority (PRA) uses a variety of methodologies to assess Pillar 2A risks. These methodologies are designed to ensure that firms hold sufficient capital to cover risks that are either not captured or not fully captured under the Capital Requirements Regulation (CRR). The key methodologies include:

1. Interest Rate Risk in the Banking Book (IRRBB):

? ?- The PRA assesses IRRBB by evaluating the impact of interest rate changes on the economic value of equity (EVE) and net interest income (NII). Firms are required to perform stress tests using a range of interest rate shock scenarios to measure their exposure to IRRBB.

2. Concentration Risk:

? ?- The PRA evaluates concentration risk by examining the firm's exposure to large counterparties, sectors, or geographical regions. This includes assessing the potential impact of default or adverse changes in these concentrated exposures.

3. Liquidity Risk:

? ?- The PRA assesses liquidity risk by reviewing the firm's liquidity management framework, including its ability to meet short-term obligations under stress scenarios. This involves evaluating the firm's liquidity buffers, funding profile, and contingency funding plans.

4. Securitization Risk:

? ?- The PRA assesses securitization risk by examining the risk characteristics and structural features of securitization exposures. This includes evaluating the appropriateness of credit risk weights and the potential impact of adverse scenarios on the performance of securitization positions.

5. Operational Risk:

? ?- The PRA assesses operational risk by reviewing the firm's internal processes, systems, and controls. This includes evaluating the firm's historical loss data, risk management practices, and business continuity plans.

6. Pension Obligation Risk:

? ?- The PRA assesses pension obligation risk by evaluating the firm's defined benefit pension schemes. This includes stress testing the pension scheme's assets and liabilities under adverse scenarios and considering the potential impact on the firm's financial position.

7. Foreign Currency Lending Risk:

? ?- The PRA assesses foreign currency lending risk by examining the firm's exposure to unhedged retail and SME borrowers. This includes evaluating the potential impact of exchange rate fluctuations on the borrower's ability to repay.

8. Group Risk:

? ?- The PRA assesses group risk by reviewing the firm's relationships with other entities in the same group. This includes evaluating the potential impact of intra-group exposures and the adequacy of capital allocation within the group.

9. Market Risk:

? ?- The PRA assesses market risk by evaluating the firm's exposure to movements in market prices, such as interest rates, foreign exchange rates, and equity prices. This includes stress testing the firm's trading book and non-trading book positions.

10. Residual Risk:

? ? - The PRA assesses residual risk by evaluating the effectiveness of the firm's credit risk mitigation techniques. This includes reviewing the firm's use of collateral, guarantees, and other risk mitigation measures.

11. Model Risk:

? ? - The PRA assesses model risk by reviewing the firm's risk measurement models. This includes evaluating the accuracy, governance, and validation of the models used for risk management.

12. Double Leverage:

? ? - The PRA assesses double leverage by evaluating the parent's use of borrowed funds to invest in its subsidiaries. This includes stress testing the parent's cash flows and the potential impact on the group's financial stability.

13. Financial Risks from Climate Change:

? ? - The PRA assesses financial risks from climate change by evaluating the firm's exposure to physical and transition risks. This includes using scenario analysis and stress testing to understand the potential impact on the firm's business model.

14. Risk of Excessive Leverage:

? ? - The PRA assesses the risk of excessive leverage by evaluating the firm's leverage ratio and contingent leverage risk. This includes reviewing the firm's use of capital-efficient trades and the potential impact of stress scenarios on the leverage ratio.

These methodologies ensure a comprehensive assessment of the various risks faced by firms, enabling the PRA to set appropriate Pillar 2A capital requirements to enhance financial stability and resilience.

Ultimately, the firm's Pillar 2A capital requirement is set by the PRA by taking into account several factors such as firm's risk profile, firm's historical performance and loss experience, forward looking assessments, firm specific stress testing and scenario analysis, firm's proposed management actions to mitigate risk and enhance capital adequacy among other things to ensure the firm holds sufficient capital to cover risks that are not fully captured under the Capital Requirements Regulation (CRR).