BoE Governor Andrew Bailey has written to the Chancellor, updating last year’s response to the letter setting out the Chancellor’s recommendations to the Prudential Regulation Committee (PRC).
The letter notes the resolution and purchase of Silicon Valley Bank and Credit Suisse respectively without any significant contagion in the UK financial system, which meant that the UK regulatory regime achieved its core goal of maintaining financial stability – but it illustrated how important it is to have properly measured capital. The letter explained the current initiatives of the Basel 3.1 reforms and PRA’s international work on liquidity.
The letter reminds us of the primary and secondary objectives of PRA. The primary objectives are to promote safety and soundness of firms it regulates, and to contribute to the securing of an appropriate degree of protection for insurance policyholders. The secondary objectives are to facilitate the international competitiveness of the UK economy and its growth in the long term and to facilitate effective competition.
With regards to advancing the primary objectives, key actions by PRA include:
- publishing the first of two near-final Policy Statements on the implementation of outstanding Basel III standards for PRA-authorised banks, building societies and firms;
- consulting on life insurers’ use of funded reinsurance transactions; and
- working to create a strong and simple regime for smaller banks and building societies.
Turning to the secondary competitiveness and growth objective, actions include:
- (in the Basel 3.1 consultation package) adjustments to the international standards to better capture the risks and improve the UK’s competitiveness;
- splitting the Basel 3.1 package to ensure full consideration of all comments received and ensuring that firms have at least a year to implement the full package in line with their feedback;
- reforming the Solvency II prudential regime for insurers to simplify overly complex requirements and improve the flexibility for firms and PRA to apply judgment in line with the UK’s regulatory approach;
- adjusting bankers’ remuneration rules, including removal of the bonus cap; and
- other initiatives, such as the work with FCA on critical third parties.
The response also highlights PRA’s work on international free trade arrangements, such as its input into the new Swiss agreement and its work to conclude the applications of 135 banks and insurers from the EEA who had applied for authorisation under the TPR.
The letter suggests further ways in which the PRA can facilitate competitiveness and growth by supporting safe innovation and by improving regulatory processes and engagement with firms, for instance, with work on AI, digital money and crypto, the Digital Securities Sandbox and payment innovation.
Finally, regarding their secondary competition objective, actions taken by PRA include:
- publishing the first policy statement of the ‘strong and simple’ framework for non-systemic banks and building societies to simplify the prudential regime for smaller firms;
- outlining PRA proposals for non-systemic banks and building societies in the UK to prepare for an orderly ‘solvent exit’; and
- developing policy proposals and implementation of regulatory reforms to the existing supervisory regime for Insurance Special Purpose Vehicles.