Chief Executive of the Prudential Regulation Authority (PRA), Andrew Bailey’s letter to the Economic Secretary to the Treasury, sets out the Bank of England’s position in favour of a differentiated regulatory approach.  This approach would support financial stability and effective competition, while allowing a more proportionate approach to applying international standards to smaller banks and building societies.

In his letter, Mr Bailey considers prospective revisions to the Capital Requirements Directive and alludes to the work the Bank is doing with the PRA to review the process of applying for credit risk Internal Ratings Based models. It is thought that the current 'one size fits all' set of rules that does not differentiate by the size or complexity of an institution, leads to a high cost of regulation for smaller firms which can result in market distortions; the Bank is, therefore, now in favour of a more proportionate approach which would encourage greater competition without having a material negative impact on financial stability.

The Economic Secretary’s response welcomes the Bank’s initiatives, which are in line with the government’s objectives to promote greater competition in banking, and confirms that the Treasury will support this agenda.