On 29 April 2021, the PRA published Discussion Paper 1/21: A strong and simple prudential framework for non-systemic banks and building societies (DP1/21). In DP1/21 the PRA explores options for developing a simpler but no less resilient prudential framework for banks and building societies that are neither systemically important nor internationally active. The objective of this framework would be to maintain the resilience of those firms and of the UK financial sector while using simplified prudential regulation, thereby enabling a dynamic and diverse banking sector in the UK. The PRA therefore refers to it as the ‘strong and simple’ framework.
The PRA’s intention is to develop a strong and simple framework that is fully consistent with the Basel Committee on Banking Supervision’s Core Principles for Effective Banking Supervision, but simpler than the Basel standards that apply to large and internationally active banks. The PRA’s long-term vision is of a strong and simple framework in which requirements expand and become more sophisticated as the size and/or complexity of firms increase. Developing a strong and simple framework along these lines represents a significant shift in the design of prudential regulation of banks and building societies in the UK. For this reason, the PRA is considering starting by developing a simpler regime for the smallest firms; i.e. the firms that probably experience the ‘complexity problem’ the most. This is where the cost to firms of understanding, interpreting, and operationalising prudential requirements are higher relative to the associated public policy benefits. Once proposals for this regime are developed, the PRA will look to build out the other layers of the strong and simple framework.
The PRA has identified options for determining which firms should be in scope of this first step of a strong and simple framework, including possible criteria based on geographical footprint, size, and activities and risk exposures. The PRA has also considered the key options for determining the shape of prudential requirements under the first step of a strong and simple framework and identified two types of design approach that can be thought of as representing two ends of a spectrum. At one end is a ‘streamlined’ approach that takes the existing prudential framework as a starting point and modifies those elements that are over-complex for smaller firms. At the other is a ‘focused’ approach based on a much narrower but more conservatively calibrated set of prudential requirements. The PRA also discusses in DP1/21 whether there may be scope to reduce mandatory prudential disclosures, such as under Pillar 3. The PRA is seeking views from users of those disclosures as well as the firms making them.
The deadline for comments on DP1/21 is 9 July 2021. The PRA intends to publish a Feedback Statement in the autumn. After analysing responses, the PRA will publish a Consultation Paper, setting out the proposed prudential rules for defining whether a firm is in scope of the simpler regime and some of the proposed requirements.
The PRA has also published a speech by Victoria Saporta (Executive Director, Prudential Policy, PRA) entitled Building strong and simple: the first step.