On 24 January 2024, the Bank of England (BoE) published a letter from its Governor, Andrew Bailey to the Chancellor of the Exchequer, Jeremy Hunt, responding to the remit for the Prudential Regulation Committee (PRC).
The letter updates the PRC’s January 2023 response to the Chancellor’s December 2022 letter setting out recommendations to the PRC. The update is required as a result of amendments made to the Bank of England Act 1998 by the Financial Services and Markets Act 2023.
In the letter, Mr Bailey discusses the recent failures of two large banks, both of which had material UK operations. He notes that, despite these incidents, the UK regulatory regime achieved its core goal of maintaining financial stability, as contagion to the global banking system was limited and there was no significant contagion into the UK financial system.
However, Mr Bailey flags that there are important lessons to be learned from these incidents; for example:
- Capital underpins the stability of the whole system, as it allows investors and depositors to have confidence in firms. However, capital only enhances confidence if it is properly measured, so the BoE’s Basel 3.1 reforms focus on ensuring risk is properly and consistently measures across firms of all types, while being mindful of the impact on the UK’s international competitiveness and growth.
- Alongside capital, liquidity is also an important part of the regulatory toolkit. Mr Bailey highlights the PRA’s work in contributing to relevant international work to consider whether lessons can be learnt as regards the liquidity framework for banks in light of these events.
- One of the recent bank failures highlights the importance of non-financial regulation and supervision, covering things like governance and controls, risk culture, and operational resilience. It also serves as a reminder that firms are most resilient when they can make profits and sustainably generate capital. Analysing whether a firm’s business model is viable and sustainable forms an important part of the FCA’s supervisory approach.
The letter also outlines the PRC’s and the PRA’s objectives, including both primary and secondary objectives, and how they are being advanced.