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    HMT Update Addresses Ring-Fencing Rules; PRA Outlines Priority Areas

    January 10, 2023

    The HM Treasury (HMT) published a policy paper that sets out the government’s response to the independent review on ring-fencing and propriety trading. Additionally, the Prudential Regulation Authority (PRA) has published letters setting out the 2023 work priorities for regulated UK deposit-taking institutions and international banks active in the UK.

    The policy paper on ring-fencing presents the government’s response to the independent review on ring-fencing and propriety trading. The independent review, which was published in March 2022, found that the benefits of the ring-fencing regime would likely reduce over time as the resolution regime is embedded and offers a more comprehensive solution to addressing the problems of "too big to fail." The review recommended that the Treasury should, therefore, review the practicalities of aligning the ring-fencing and resolution regimes, with a view of introducing a new power for the authorities to remove banks that are judged to be resolvable, from the ring-fencing regime. The government agrees with the recommendations of the panel to review practicalities of aligning the two regimes and intends to issue a public consultation in the first quarter of 2023 on the long-term benefits of the ring-fencing regime, in light of developments in the resolution regime and relevant advances in the wider regulatory framework. The consultation on reform measures cover recommendations on taking banking groups without major investment banking operations out of the regime, updating the definition of relevant financial institution, removing blanket geographical restrictions on ring-fenced banks operating subsidiaries or servicing clients outside the European Economic Area (EEA), taking forward technical amendments outlined in the review to improve the functioning of the regime, and updating the list of activities which ring-fenced banks are restricted from carrying out. The government also intends to consult in mid-2023 on plans to increase the deposit threshold from GBP 25 billion to GBP 35 billion, alongside consulting on the above reform measures.

    The letters on 2023 work priorities for both, UK deposit taking institutions and international banks active in the UK, set out focus on areas related to the assessment of credit risk management of firms, the financial resilience of individual firms through ongoing assessment of capital and liquidity positions, the ability of firms to monitor and manage counterparty exposures for non-bank financial institutions, the operational risk and resilience rules, the financial risks arising from climate change, the diversity and inclusion in the financial sector, the resolution strategy, and the rules on model risk management principles. Data also remains an area of focus for PRA as the submission of complete, timely, and accurate regulatory returns remains the foundation of effective supervision. PRA notes that it continues to invest in delivering its own Regulatory Technology and Data Strategy, for which accurate firm submissions of data and information are critical. Over recent years, PRA has commissioned a program of skilled persons reviews, which have repeatedly identified deficiencies in the controls over data, governance, systems, and production controls related to regulatory reporting. PRA expects firms to consider the thematic findings set out in the communications on regulatory reporting to inform how best to improve their submissions going forward. PRA will continue to use skilled persons reviews in this area in 2023. PRA will also be engaging with firms in 2023 on which data it collects as part of the Banking Data Review and will continue to consult firms on the long-term reforms to the data is collected as part of the Transforming Data Collection Program. PRA notes that these letters in conjunction with an individual firm’s Periodic Summary Meeting letter would convey a sense of the planned work for 2023. 


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    Keywords: Europe, UK, Banking, Ring Fencing, Resolution Regime, Basel, Reporting, Credit Risk, Regulatory Capital, Operational Risk, Operational Resilience, Climate Change Risk, Diversity and Inclusion, Model Risk, Ring-Fencing, PRA, HM Treasury

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