On 12 November 2020, the PRA published the Mansion House speech by Sam Woods (Deputy Governor for Prudential Regulation and Chief Executive Officer, PRA) covering the PRA’s intention to implement a strong and simple regime for regulating small UK banks and building societies.
Key points in the speech include:
- The reason why the PRA has kept up work on a possible regime for regulating small UK banks and building societies is that the UK’s exit from the EU provides the first opportunity it has had in a long time to make real progress on it.
- As the host of a very large international financial centre, the PRA has a global responsibility to maintain high prudential standards in the UK. This is important for the Bank of England’s objective of financial stability, but it also makes sense for industrial policy for the UK financial services industry: the UK wants people to bring their money to the City for the right reasons, not the wrong ones, and it has no interest whatsoever in a race-to-the-bottom approach to financial regulation.
- The UK’s success in financial services has been built on the ability to innovate, adapt to new developments and allow a suitable rough-and-tumble of financial services firms entering and exiting the market.
- Before coming to design choices, there is one important principle to establish from the outset – the PRA has no interest in moving to a weaker prudential regime for small firms. Small firm failures will inevitably occur as part of having a dynamic banking sector. On the one hand, the PRA has been very successful in its efforts to encourage new entry: since 2013 it has approved 25 new UK banks (as well as 24 international ones). On the other hand, the PRA does not seek to operate a zero failure regime, and it has overseen the exit from the market of 12 small UK banks in recent years. But the key principle is that this process must be orderly, and that principle relies on strong prudential standards.
- In designing a strong and simple regime for small UK banks and building societies the PRA will have to decide on two things: (i) which firms are in the regime; and (ii) how to simplify the requirements.
- On the first issue, size measured by total assets may be one good proxy on the basis that it is simple although other factors could also be brought in including whether or not the firm is systemically important. On the second issue the two main options, which are not mutually exclusive, are: (i) replace existing requirements with simpler versions; and/or (ii) narrow the set of applicable requirements.