PRA is consulting on its approach to new and growing, non-systemic banks. It is making 2 new proposals, and taking the opportunity to clarify its position in other areas. The new proposals are:
- changes to the calculation of the PRA buffer for new banks: this is currently based on a wind down cost calculation, which PRA has found firms interpret inconsistently. It now wants to calibrate the buffer to allow banks to find alternative sources of capital or make business model adjustments, and to allow them 6 months to do this. On that basis, the PRA capital buffer for new banks would be 6 months’ operating expenses; and
- setting expectations in relation to solvent wind down plans. PRA notes that the likelihood of bank failure may be higher in its early years, but equally, the orderly failure of a growing firm is likely to have no, or minimal, impact on financial stability. So it wants to focus on the importance of wind-down plans, and require new banks to have solvent wind-down plans in place at the point of authorisation.
PRA thinks the changes will help banks understand how and why its expectations increase as they grow and mature, and also clarifies that in a competitive environment it is normal to see both entry and exit of banks. It also wants to stress its aim that it engages in open, constructive and forward-looking communication with banks.
PRA asks for comments by 14 October and for the changes to take effect in the first half of 2021.