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    PRA to Impose No Further Restrictions on Proprietary Trading by Banks

    September 21, 2020

    PRA published a report that reviews the extent of proprietary trading engaged in by PRA-authorized deposit takers and investment firms incorporated in UK. The report discusses the extent of the proprietary trading activity, the risks it poses to the safety and soundness of firms, the tools PRA has to mitigate these risks, and the experience of other countries in restricting proprietary trading within the banking sector. It also addresses whether the ring-fencing regime, together with the other tools available to PRA, are sufficient to mitigate the risks proprietary trading poses to financial stability and soundness of firms. The analysis concludes that, at present, no further restrictions ought to be imposed on proprietary trading by banks.

    The report has been prepared pursuant to Section 9 of the Financial Services (Banking Reform) Act 2013. During the debates which preceded the 2013 Act, the question arose as to whether the UK should impose some form of ban on proprietary trading by all banks, as, for instance, the United States had with the Volcker Rule. Parliament took the view that there should be strong restrictions on proprietary risk-taking within ring-fenced banks, but that a complete ban for all banks was not justified by the evidence available at the time. Instead, PRA was required to review the case for further restrictions on proprietary trading within a year of the commencement of ring-fencing. As mandated in the legislation, this report has been submitted to HM Treasury and laid before Parliament. This report, which is a result of the mandated review, concludes that no further restrictions ought to be imposed on proprietary trading by banks. 

    The review also points out that PRA already has substantial supervisory powers for mitigating the risks created by proprietary trading in its various forms, where appropriate; therefore, it does not need new powers to address these risks. Different risks are addressed using different tools, including capital requirements, disclosure, supervisory expectations concerning controls, governance and risk management, and senior management attestation. The analysis also highlights that certain policy measures in the implementation phase will improve the treatment of some proprietary trading risks within banks. Prominently, the fundamental review of the trading book, being implemented as part of the Basel 3.1 package, will clarify the boundary between banks’ trading and banking books and will improve the capitalization of trading book risks. There is some risk that conditions may change to make proprietary trading, including classic proprietary trading, more attractive for firms within the banking sector once again. While this seems unlikely at present, it is possible. Thus, PRA will continue to monitor a number of indicators that could indicate a growth in the risks arising from proprietary trading activity by relevant authorized persons and will investigate if these show a substantially higher trend.

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    Keywords: Europe, UK, Banking, Proprietary Trading, Volcker Rule, Credit Risk, Market Risk, Ring Fencing, Basel, PRA

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