The PRA has published an updated version of its approach document ‘The PRA Approach to Banking Supervision’. The document sets out how the PRA will advance its objectives in relation to deposit-takers and designated firms, and contains a number of changes reflecting feedback received and other recent developments.
The main changes are:
- An updated explanation of the PRA’s new secondary objective. Since 1 March 2014, the PRA has had a secondary obligation, to act, so far as is ‘reasonably possible’ in a way that facilitates effective competition in the markets for services provided by PRA-authorised firms when they carry on regulated activities.
- The addition of a statement regarding The Bank of England and Financial Services Bill. The Bill proposes to integrate the PRA into the Bank as one legal entity by transferring the PRA’s functions to the Bank. The document provides details of the PRA’s current governance structure (which will be updated accordingly should the Bill become law).
- Amendments to the text regarding the new PRA Rulebook. In 2015 the PRA launched the PRA Rulebook (which sets out the requirements that a firm must meet for its business to be conducted in a safe and sound manner). The PRA intends to strictly limit the use of guidance material in the Rulebook. Other relevant types of material will be published separately.
- Addition of text regarding resolvability. A firm is considered to be resolvable if, in the event that it failed, its customers would still have the appropriate degree of continuity of access to its critical economic functions, without excessive disruption to the financial system or exposing public funds to losses. The document outlines how the PRA and the Bank will co-operate closely to improve resolvability.
- Addition of text regarding the stress testing regime. The stress testing regime, which was introduced in 2014, examines the potential impact of a hypothetical adverse scenario on the health of the banking system. The PRA expects higher standards of risk mitigation from firms posing greater risks to the stability of the UK financial system.
- Amendments to the text regarding capital. For all firms, the PRA determines a minimum regulatory capital level and buffers on top of this. The document outlines the framework for this.
- Addition of text regarding the leverage ratio framework. The PRA expects firms to consider whether their degree of leverage is appropriate against the internationally agreed measure of leverage on a non-risk weighted basis. The PRA requires a minimum leverage ratio to be met at all times and expects firms to have regulatory capital that is equal to or greater than any applicable leverage ratio buffers. The document outlines the framework for this.
- Amendments to the text regarding liquidity. This is to reflect EU legislation.
- Removal of Box 9 ‘Staffing the PRA’. This is to reduce duplication with other publications.