Following our recent blog on the PRA’s new consultation on international banks, the regulator has issued a speech by David Bailey (PRA Executive Director, Financial Market Infrastructure) on the same topic.

In his speech Mr Bailey describes in more detail the concept of responsible openness which Sam Woods first described in his 2019 Mansion House speech. Mr Bailey also covers supervisory cooperation noting in particular the open and supportive relationship the UK regulators have with the European Central Bank and national competent authorities across the EU. He also highlights three areas from the consultation being information sharing, governance and booking models.

In terms of governance Mr Bailey emphasises two points:

  • For subsidiaries, the PRA expects the local board to play an active role. This means it should be joined up with its parent board in terms of information flows and it should ensure the PRA is sighted on relevant group developments.
  • The PRA recognises explicitly that for some small subsidiaries it may be appropriate for a group executive to play a role in the local board (e.g. a small UK subsidiary of a large overseas bank) that it would not consider appropriate in a larger firm. So the PRA can be open to having group executives, as say Chair, but the firm will still need appropriate independent challenge on the board.

In terms of booking models, Mr Bailey explains that the overall approach remains stable and consistent. The PRA is open to global booking models, recognising that they underpin global business models, provided they are managed responsibly. The PRA is also not prescriptive about the types of booking arrangement that firms may operate. It does not for example prescribe a certain percentage of risk to be managed locally. The PRA’s goal continues to be to ensure that firms’ manage appropriately the risks that they originate, receive and transfer out of the UK entities.

Mr Bailey adds that booking models need to be transparent – to both regulators and firm management – so that they are capable of being understood and followed. There should also be adequate pre-trade and post trade systems and controls in place to ensure that intended booking arrangements are followed. According to Mr Bailey this means that in practice the international bank should have an appropriate local risk management capability. There should also be a senior management function allocated responsibility for ensuring that there are appropriate controls in place to manage booking arrangements, including remote booking. Mr Bailey warns that where the PRA’s expected standards are not met the regulator may require more local risk management or limit the degree of connectivity that the firm has with the rest of the group so that less risk is brought into, or transferred out, of the UK.

Mr Bailey also reminds firms that when it introduced high-level booking principles in Supervisory Statement 1/18 ‘International banks: the PRA’s approach to branch authorisation and supervision’, firms undertook a self-assessment and many indicated that they did not – at the time – meet them all. The PRA has since worked with these firms bilaterally to close any gaps, but Mr Bailey expects that the PRA will ask firms to repeat this self-assessment exercise in the near future.