Vicky Saporta of BoE Speaks on Future of Prudential Bank Regulation

Ms. Saporta welcomed the finalization of Basel III as “a major milestone for regulators globally," as it puts in place the final elements of the reforms to banking regulation agreed since the crisis. She added that the central aim is to reduce the excessive variability of banks’ risk-weighted assets and, in doing so, make banks’ risk-based capital ratios more transparent and comparable. UK has developed a range of domestic reforms reflecting the importance of the banking system as a share of the UK economy. These range from the development and implementation of a new institutional framework for macro-prudential policy to deal with threats to financial stability, to the design of micro-prudential remuneration rules that better align risk-taking incentives with variable pay, to the Senior Managers and Certification Regime aimed at improving individual accountability at PRA-authorized institutions. It is also undertaking structural reform to protect retail payments and lending to households and businesses from shocks to other parts of banking groups specializing in serving wholesale customers.

Looking ahead, Ms. Saporta said that industry should not expect a lot of further reform to bank regulation, particularly regulations regarding banks’ capital and liquidity. The focus of regulators, both in the UK and internationally, is pivoting toward three things: completing the implementation of the post-crisis reforms, making adjustments to the framework in response to new risks, and making adjustments to the framework in response to the unintended consequences. She also set out some principles that will guide us in ensuring that the adjustments made are appropriate. These principles provide that adjustments should be in line with the objectives of the regulation and/or of regulators, evidence-led, aim to address a problem that has been identified.

Alongside some examples of where such adjustments have been made, she emphasized that horizon scanning and evaluation will be the key mechanisms in identifying other aspects of regulation that may require adjustment. In this context, she pointed to the ongoing evaluation exercise on central clearing incentives by FSB. She provided evidence that suggests that the current design of the leverage ratio is deterring banks that are most affected by the regulation from clearing over-the-counter derivatives on behalf of clients. In conclusion, she reiterated that BoE “will consider making adjustments to regulations in response to unintended consequences and new risks to ensure that the resilience we injected into the banking system post-crisis stands the test of time.” 

Related Links

• Press Release (PDF)
• Speech (PDF)

Keywords: Europe, UK, Banking, Basel III Finalization, Basel III, Prudential Framework, BoE