PRA to take “intensive” approach

Sarah Davidson

May 19, 2011

The Bank of England and the Financial Services Authority published a joint paper this morning revealing how the new regulator will approach the supervision of banks, building societies, credit unions and investment firms.

Hector Sants, FSA chief executive and PRA chief executive designate, said: “The PRA’s purpose is fundamentally different from that of previous regulatory regimes and will lead to a significantly different model of supervision to that which was in use pre-2007. In designing this new model we have incorporated both the lessons learned from the last financial crisis and those from firm failures of the past.

“The new regulatory model will be based on forward looking judgements and will be underpinned by the fact that the PRA has a single objective to promote the stability of the UK financial system and in consequence will be a very focused organisation. The new supervisory approach will build on the more intensive approach adopted by the FSA since the crisis.”

Andrew Bailey, FSA director of UK banks and building societies and PRA deputy chief executive designate, said: “Maintaining financial stability is an objective in public policy which we should all value highly. We have seen what happens when we lose it. But achieving and maintaining financial stability does not mean that we have an industry in which no-one can fail.

“In order to deliver its objective of stability of the financial system, the PRA will use a new framework to assess risks to financial stability. This document sets out our thinking so far and aims to foster debate about the design of the PRA.”

The paper will be presented and discussed at a conference in London today for CEOs and senior managers of firms that will come under the PRA’s supervisory control.

British Bankers’ Association chief executive, Angela Knight, said the paper was an important step forward.

She said the banking industry was fully supportive of sensible, considered reform and welcomed the opportunity created by the formation of the PRA to “take forward the lessons we have all learned while retaining good points from the FSA”.

She also highlighted the importance for the new body of attracting high calibre staff as supervisors as well as the importance of balancing the regulatory authorities’ core statutory objectives; ensuring the macro-prudential element of the regulatory toolbox is introduced in an internationally coordinated way; accountability and transparency; working hard on relationships with other European Union members; and engaging effectively with the European Banking Authority and other international bodies.

Knight said: “The banking industry in the UK is fully supportive of sensible and considered reform and has already made significant strides in overhauling and enhancing its own working practices.

“Today’s announcement, setting out the authorities’ approach to banking supervision in the future, is a welcome step forward offering a real opportunity to progress the lessons we have all learned to create a stronger regulatory framework for the future.”

A companion paper will be published in June 2011 to cover the PRA’s approach to supervising insurance companies.

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