PRA clarifies O-SII buffer usability in systemic stress
The Prudential Regulation Authority (PRA) has clarified its ability to release Other Systemically Important Institution (O-SII) buffers during systemic stress. This aims to enhance buffer usability and support real economy lending.
Unlocking O-SII buffers
The Prudential Regulation Authority (PRA) clarifies its power to release Other Systemically Important Institution (O-SII) buffers during systemic stress.
This involves exercising existing discretionary powers to vary O-SII buffer rates, including setting them to zero, under the Capital Buffers and Macro-prudential Measures Regulations 2025.
Releasing the O-SII buffer would lower the capital level at which automatic distribution restrictions apply, encouraging banks to use buffers to absorb losses rather than restricting lending.
The PRA would provide an indicative period after release, during which no increase would be expected, to ensure the capital is fully utilised.
The subsequent rebuild of buffers would be gradual, depending on banks' ability to restore capital while continuing to support the real economy, aligning with the UK's countercyclical capital buffer (CCyB) policy strategy.
FPC's vision for simpler buffers
This clarification aligns with the Financial Policy Committee's (FPC) vision for a simpler and more effective capital buffer framework.
Announced in December 2025, the FPC's initiative aims to reduce banks' incentives to hold capital in excess of requirements, thereby supporting real economy lending.
The PRA endorses this vision, which centres on a single buffer releasable in stress without automatic distribution restrictions.
More broadly, the PRA reiterates that all regulatory buffers – including the PRA buffer, the CCyB, systemic buffers, and the capital conservation buffer – are designed to be used as necessary in a stress to absorb losses.
This ensures banks can continue to support the real economy and maintain market functioning.
Clarity, but the test awaits
This statement provides welcome clarity on a long-standing issue of capital buffer usability, which has often been debated.
While not introducing new policy, it significantly strengthens the message that buffers are designed to be used, not merely held as static requirements.
The true impact will depend on the PRA's decisive action in a future stress and how effectively it manages market and rating agency perceptions during a release.