Featured Product

    Sam Woods of PRA on Supervision and Regulatory Artibtrage

    July 10, 2017

    PRA published remarks of Sam Woods, the Deputy Governor for Prudential Regulation and Chief Executive Officer of PRA, which were published for the May 2017 Building Society Association Annual Conference. He discussed the importance of supervision in banking and insurance sectors and examined how supervision differs from regulation. He also highlighted that “financial institutions will always be able to innovate faster than we are able to modify the prudential rulebook,” warning that some innovation is “pure regulatory arbitrage.”

    Mr. Woods explained that regulation concerns the framework of rules and legal standards that govern the way in which firms operate whereas supervision is the dynamic pursuit of the relevant authority’s statutory objectives, through oversight of firms’ activities. In his view, supervision without regulation, or vice versa, in financial services would be futile. He added that some innovation is “pure regulatory arbitrage," highlighting that firms innovate to reduce specific regulatory requirements without any commensurate reduction in their risk. He gave a few examples of such behavior that might be problematic, despite compliance with the specified rules. For instance, he mentioned that some banks are seeking out funding that matures just beyond the time horizon used to calculate regulatory liquidity requirements. Another example he gave was about how some special purpose vehicles, derivatives, agency structures, or collateral swaps carry material credit risk, which escapes the detailed aspects of the capital framework. He also exemplified that some insurance firms have sought to amend the existing contracts to extend the (Solvency II) contract boundary and recognize more future profit, as firms cannot recognize future premiums on unit-linked savings policies that do not include any insurance cover or financial guarantee of benefits. In this context, he stated that “Consistent with the PRA’s statutory duty, firms should expect questions and should be prepared to defend them according to our principles of prudence, effective risk management, and adequacy of financial resources at all times.”

     

    He observed that “The supervisory approach for banks, building societies, and insurers in the UK has meandered down different paths, at different times—and each at a different pace. Indeed, even when regulation has been laid down in statute, each supervisory agency has taken time to develop and embed its own approach.” PRA supervisors also pay close attention to the emerging trends and potential future risks and supervisors will continue to keep a close eye on the effects of issues on the viability of business models and future strategy for building societies. Finally, he reinforced “that supervision—as distinct from regulation—is vital if we are to ensure that the framework of regulation operates effectively and as intended. Supervisors have an important job to do—defending the reforms put in place following the most recent crisis.”

     

    Related Link: Speech (PDF)

    Keywords: Europe, United Kingdom, PRA, Supervision, Banking, Insurance, Regulatory Arbitrage

    Related Articles
    News

    BCBS Amends Guidelines on Sound Management of AML/CFT Risks

    BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).

    July 02, 2020 WebPage Regulatory News
    News

    US Agencies Finalize Amendments to Swap Margin Rule

    US Agencies (Farm Credit Administration, FDIC, FED, FHFA, and OCC) finalized changes to the swap margin rule to facilitate implementation of prudent risk management strategies at banks and other entities with significant swap activities.

    July 01, 2020 WebPage Regulatory News
    News

    PRA Letter Sets Expectations on Approach to Managing Climate Risks

    PRA published a letter that builds on the expectations set out in the supervisory statement (SS3/19) on enhancing banks' and insurers' approaches to managing the financial risks from climate change.

    July 01, 2020 WebPage Regulatory News
    News

    EBA Guidelines on Treatment of Structural Foreign Exchange Under CRR

    EBA finalized the guidelines on treatment of structural foreign-exchange (FX) positions under Article 352(2) of the Capital Requirements Regulation (CRR).

    July 01, 2020 WebPage Regulatory News
    News

    FSB Issues Statement on Impact of COVID-19 Crisis on Benchmark Reform

    FSB published a statement on the impact of COVID-19 pandemic on global benchmark transition.

    July 01, 2020 WebPage Regulatory News
    News

    IAIS Publishes List of Internationally Active Insurance Groups

    IAIS published the list of Internationally Active Insurance Groups (IAIGs) publicly disclosed by group-wide supervisors.

    July 01, 2020 WebPage Regulatory News
    News

    FED Temporarily Revises FR Y-9C With Respect to PPPLF and CARES Act

    FED has temporarily revised the reporting form on consolidated financial statements for holding companies (FR Y-9C; OMB No. 7100-0128).

    July 01, 2020 WebPage Regulatory News
    News

    EC Launches Consultation on Review of Solvency II Directive

    EC launched a consultation on the review of the key elements of Solvency II Directive, with the comment period ending on October 21, 2020.

    July 01, 2020 WebPage Regulatory News
    News

    ECB Consults on Supervisory Approach to Consolidation in Banking

    ECB launched a consultation on the guide that sets out supervisory approach to consolidation projects in the banking sector.

    July 01, 2020 WebPage Regulatory News
    News

    IAIS on Package for 2020 Data Collection on ICS and Aggregation Method

    IAIS published technical specifications, questionnaires, and templates for 2020 Insurance Capital Standard (ICS) and Aggregation Method data collections.

    June 30, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5425