PRA has issued its final form Supervisory Statement on its expectations on “new and growing” non-systemic UK banks. The statement takes effect from its publication on 15 April, and follows PRA’s consultation – as a result of which a few changes were made,
The statement sets out how PRA’s expectations of banks that are applying for or have recently achieved authorisation will evolve up to the point the bank is regarded as “fully established”. It looks at:
- progress of new bank authorisation and common issues of new and growing banks, including how it has made use of the “mobilisation” stage;
- common supervisory issues such as business model, governance, risk management and controls;, which are untested at the point of authorisation and therefore would not be likely to meet PRA’s standards for established banks. The statement includes guidance on how PRA expects the Board structure to evolve, specifically in terms of its expectations on numbers of NEDs and independence of the board. PRA also notes that new banks tend not to keep their control environment in line with the size of their business and so outgrow their control environment. It also highlights the high use of outsourcing by new banks, and stresses the importance of meeting its expectations on third party risk management;
- expectations for capital management including how the PRA buffer is calibrated for these banks. To start with, the buffer will be set on the basis of 6 months forward operating expenses with additional capital holding. PRA stresses the need for banks to work towards profitability after the initial cash injections they will seek, and the need to manage the capital position on a sufficiently forward looking basis;
- how PRA and the BoE are working together to ensure these banks can exit the market in an orderly manner – by having plans that are practical and workable in times of stress; and
- PRA’s supervisory approach once the bank is “established”, including the need for banks to communicate with PRA and change in risk appetite and business model.
PRA notes that some newly authorised banks will have the resource and experience to move to the standard it expects of established banks more quickly than others, and says it will apply its judgment appropriately to assess what standards to apply at what time. Generally, though, it expects the principles apply for up to 5 years post-authorisation.
PRA has made some changes to other supervisory guidance to reflect the statement.