PRA buffer proposal

5.1 The PRA proposed that the PRA buffer for new banks would be calculated on the basis of six months' projected operating expenses. The PRA also explained that the purpose of the buffer is to allow such banks time to find alternative sources of capital or make business model adjustments in the event of a loss of investor support.

5.2 Two respondents welcomed the simplicity of the calculation, and the clarity in relation to the rationale. However, some respondents expressed concerns that the proposal would result in an increase in the size of the buffer compared to the current approach. One respondent asserted that this proposal would further extend the benefit larger banks have and further embed the competitive disadvantages in capital requirements for new and non-systemic banks, with another respondent being concerned that it would put considerable strain on new banks at a critical time in their development.

5.3 The PRA notes that the new calibration methodology would frequently result in a significantly reduced PRA buffer for new banks compared to a buffer calibrated using the methodology for established banks, which is calculated based on the amount of capital needed to remain above Total Capital Requirement (TCR) under a severe but plausible stress scenario. This new calibration of the PRA buffer continues to recognise the need to take a proportionate approach to the level of capital relative to the financial stability risks posed by new banks. The PRA notes that the PRA buffer does not necessarily provide sufficient capital for banks to survive a stress or enact a SWD, and boards of new and growing banks should be aware of this when setting their internal capital risk appetites.