PRA to Impose No Further Restrictions on Proprietary Trading by Banks
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.
Related Links
Keywords: Europe, UK, Banking, Proprietary Trading, Volcker Rule, Credit Risk, Market Risk, Ring Fencing, Basel, PRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
BoM Revises Guideline on Outsourcing by Financial InstitutionsRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
