Summary
Bailey’s speech focuses on how the PRA uses research to advance its objectives, but in particular its secondary competitiveness and growth objective (SCGO) and also explains that to guide its approach to advancing the SCGO, it has developed a framework that sets out how regulation can facilitate competitiveness and growth, built on three foundations:
- Foundation one – Maintaining trust in the UK financial system: Bailey sets out that while promoting growth is a secondary objective, the PRA considers that it must not come at the expense of financial stability and that trust in the regulatory framework supports sustainable growth and investment and is underpinned by evidence-based policymaking. Examples include the FPC’s review of bank capital requirements, drawing on more than 70 academic studies to identify capital levels that best balance resilience and lending capacity. Research has also informed proposals on capital buffer usability and funded reinsurance, helping ensure regulation supports both financial stability and long-term economic growth.
- Foundation Two – Operating efficiently and ensuring proportionality: Bailey sets out that efficiency and proportionality are key foundations of the PRA’s approach and that, while regulation is necessary to achieve prudential objectives, it should be targeted and avoid imposing unnecessary costs that could hinder competitiveness or innovation. Research helps identify where requirements deliver genuine prudential benefits and where they create unintended burdens. A notable example is the removal of the bank bonus cap inherited from the EU. Research showed the cap did not restrain overall pay growth but instead shifted remuneration towards fixed pay, weakening links between pay and risk-taking incentives. These reforms were supported by academic analysis, policy expertise and firm-level regulatory data.
- Foundation Three – Responsiveness and enabling safe innovation: Bailey also explains that responsiveness and enabling safe innovation form the third foundation of the PRA’s approach and that the PRA recognises that innovation is difficult to regulate because new technologies and business models often lack established evidence. It highlights three ways regulation can support innovation: reducing uncertainty through clear regulatory expectations, adopting outcome-based rather than overly prescriptive rules, and improving risk measurement. Greater certainty can encourage investment and innovation, while flexible regulation allows firms to develop new solutions. Bailey further sets out that the PRA’s technology-neutral approach to AI reflects this balance. Better risk measurement, including through stress testing and risk-sensitive capital requirements, can also support innovation by making new opportunities easier to assess and manage.
Overall, Bailey concludes that rigorous research matter to the PRA and that it is integral to how it makes policy and evaluates outcomes.