The PRA's approach to new and growing banks
Roundtable recap: The future of Prudential Regulation for mid-size non-systemic banks and building societies
04 August 2021 ·
Joined by Simon Hills, Director of Prudential Regulation at UK Finance, and a panel of attendees from across the banking sector, our latest roundtable encouraged discussions around the PRAs future vision of Prudential Regulation for non-systemic banks, commonly referred to as the ‘strong and simple regime’.
Dean summarised the regulations by focusing on three broad categories:
1. 'The Complexity Problem' and how we got here
Global regulation previously focused on large, systemic international banks, with all lenders covered by the same set of rules. As the landscape has evolved, a one-size-fits-all approach came under scrutiny from regulators and lenders alike. In the UK, the upsurge in new entrants and challenger banks targeting specific sectors and demographics has meant that regulatory burden has become quite cumbersome; meeting all the regulations can be prohibitively expensive. Hence, the PRA terms ‘the complexity problem’ as one driver behind the need for change. Indeed, the PRA has already implemented changes aimed at new and growing banks (less than 5 years since approval) and simplified prudential regulations for credit unions.
2. Vision – what are the PRA trying to achieve?
A new ‘strong and simple’ approach. The PRA won’t give ground on maintaining the strength on the banking sector but wish to adopt a new set of simpler rules for smaller entities. The PRA has hinted that this will impact the smallest, least complex banks first, extending to medium-sized lenders thereafter. There are no proposed changes for internationally active or complex banks.
3. What changes are likely as a result?
Two options are in play: a focused option, replacing existing regulation with a simpler code, or a streamlined option, where the building blocks of the existing regulation are retained but simplified.
It’s these choices that are currently under consultation with lenders. We expect the development of new rules will be a long, cautious process. While the initial discussion process has ended, there are lots more opportunities to influence the direction of travel.
UK Finance’s response
UK Finance welcomes the 'strong & simple' initiative and are strongly supportive of its aims, believing it to represent a more proportionate, nuanced approach to banking regulation. The UK lending industry demonstrated good engagement and a high degree of consensus around what was needed.
The new regulations will distinguish between domestic and international firms; they will focus on banks with smaller asset sizes and may exclude those with riskier lending activities. The regime may also exclude IRB lenders and those with complex infrastructures, but accommodate those with simple legal structures and a focus on ordinary banking services rather than trading activity. Nevertheless, the currently proposed inclusion rules may exclude some mid-tier lenders who aren’t planning to grow, and it was thought that some accommodation should be made for those lenders.
Attendees overwhelmingly believed that the selection of firms for inclusion in ‘strong and simple’ should include both quantitative and qualitative measures, rather than a simple split based solely on asset size. There was recognition that a more complex set of rules may make eligibility for ‘strong and simple’ seem less clear cut.
While there wasn’t unanimity within the consultation, UK Finance’s view is that a combination of focused and streamlined approach is preferable, accepting that regulatory complexity increases with a lender’s growth. However, the majority view was that the streamlined approach was far preferable, with a need for any such changes to be easily implemented, and a desire for firms to have some flexibility.
UK Finance recommended a simplification of Pillar 2 requirements, replacing them with a more conservative Pillar 1 approach which might enable the removal of buffers, but highlighted the need for a trade-off between higher capital requirements and a significant reduction in regulatory burden. They also suggested a simplification of liquidity reporting requirements as well as other recommendations. You can read more about the UK Finance response here.
In the ensuing debate, it was suggested that an excessively simple regime for smaller banks followed by additional layers of regulations for progressively larger banks, could stifle competition. Introducing ‘cliff edge’ boundaries between different types of competing organisation could act as a barrier to growth. A more tapered eligibility, which facilitates growth, was preferred.
The role of supervision in a ‘strong and simple’ regime
The move away from a one-size-fits-all process brings benefits for the PRA – e.g. an ability to deploy resource at more ‘important’ systemic cases. Attendees felt that the regulator’s informal role in handholding during the early stages of a bank’s development has largely disappeared.
Attendees reported a recent trend for desktop exercises which they felt were of limited mutual value. There was wide agreement that a lower regulatory engagement would not, in isolation, be a welcome trade-off for a simpler regime.
Main benefits of the ‘strong and simple’ approach
While most attendees referenced a simplification of Pillar 2a as being the biggest potential benefit, ICAAP and ILAAP reporting also generated a larger discussion. With a constant cycle of activity and limited visibility on when the regulator has reviewed the reports, these processes are viewed as somewhat onerous and time-consuming when completed annually. A lower frequency of completing detailed ICAAP/ILLAPs every 2 years, with alternative years being addressed with a more simplified approach, would be preferred.
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