PRA published a discussion paper that explores options for developing a simpler but resilient prudential framework for banks and building societies that are neither systemically important nor internationally active. The comment period on ideas in the discussion paper ends on July 09, 2021, with a feedback statement on comments received expected to be published in Autumn. After analyzing responses, the next step by the regulator will be to 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. Design and implementation of the framework is likely to take a number of years to complete.
The discussion paper sets out the thinking of PRA about how it could deliver a simpler regime for the smallest non-systemic banks and building societies as a first step in building a “strong and simple” framework that could eventually extend simplification to larger, but still non-systemic UK domestic firms. The intention is to develop a strong and simple framework that is fully consistent with the Basel Core Principles for Effective Banking Supervision, but simpler than the Basel standards that apply to large and internationally active banks. The existing regulatory approach in the UK, which is based on the approach adopted in EU, broadly applies the same requirements to all banks and building societies, irrespective of their size and activities. It does simplify certain prudential rules for smaller banks and building societies, but to a lesser extent than in some other jurisdictions. Any future changes designed to simplify prudential regulation for smaller firms will be balanced against the risk of increasing barriers to growth that may discourage smaller banks and building societies from becoming large enough to provide effective competitive challenge to largest banks and building societies.
A fully focused approach to capital requirements could involve a simple standard capital requirement measure that is relatively risk insensitive but conservatively calibrated and setting a single micro-prudential buffer at the same level for all firms. Similarly, a fully focused approach could involve a single liquidity requirement, rather than the existing Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) requirements, again with conservative calibration. There may also be a need for supervisory judgment overlays to compensate for reduced risk-sensitivity of prudential requirements. A fully streamlined approach would take the existing prudential framework as a starting point and modify those elements that appear over-complex for smaller firms. For capital adequacy requirements, this might be achieved by simplifying the current Pillar 1 and Pillar 2A risk-weighted capital requirements. Similarly, for liquidity requirements this could involve simplifying the LCR and NSFR requirements. Some elements of the regime would need to apply equally under both approaches. The paper also discusses whether there may be scope to reduce mandatory prudential disclosures, such as under Pillar 3: PRA is seeking views from users of those disclosures as well as the firms
making them. Once the overall shape of the simpler regime is clearer, PRA will be able to consider the implications for reporting requirements in full.
While speaking at a BoE Webinar, Victoria Saporta, the Executive Director of Prudential Policy, explained the regulatory vision in this area and outlined the following key policy choices on which the comments are being sought:
- First, is it right to start with the smallest banks and then move in time toward bigger ones as we build a graduated strong and simple framework? Is this the right first step?
- Second, are the scope criteria the right ones and, if so, where should we draw the line in terms of size?
- Third, would you prefer a focused approach with few more conservative requirements, or a streamlined approach?
Comment Due Date: July 09, 2021
Keywords: Europe, UK, Banking, Basel, Regulatory Capital, Reporting, Reporting, Disclosures, Proportionality, Prudential Frameworks, Non-Systemic Risk, BoE, PRA
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