Strong and simple, but let’s go further quicker

On Friday 22 July we submitted our response to the PRA’s Consultation Paper 5/22 The Strong and Simple Framework: a definition of a Simpler-regime firm.

Earlier in the week, along with other colleagues from the industry, I gave evidence to the Treasury Select Committee’s sub-committee inquiry into the Prudential Regulation Authority (PRA)’s proposals for a Strong and Simple regime, which you can view here.

We have long called for a more proportionate approach to prudential regulation that would be applied to banks and building societies that do not pose significant risks to the safety and soundness of the UK’s financial system. We have thus very much welcomed the PRA’s initiative, made possible post-Brexit, to introduce a more nuanced regime.

The PRA has proposed that a simpler-regime firm would:

  • have less than 15 billion in total assets, calculated as a three-year average
  • have on-and off-balance sheet trading book business of less than five per cent of total assets and no more than £44 million
  • not on the Internal Rating Based approach for calculating risk requirements
  • not operate to a specialised business model, such as custody or clearing and settlement services
  • have at least 85 per cent of its exposures in the UK.

This first consultation on scope will be followed by consultations on the liquidity and capital requirements that would apply to simpler regime firms over the next couple of years. Of course, it is not until these consultations have been concluded that simpler-regime firms will be able to assess their impact on their own capital and liquidity requirements. We encouraged the PRA to accelerate its proposals on the requirements of a simpler regime suggesting that they should be finalised by the end of 2023, at the same time as Basel 3.1 comes into effect.

The PRA’s plans to develop a next-tier-up ‘Large and Simple’ regime in parallel, but to a lagged timetable. In our view, the simple expedient of increasing the proposed total asset threshold from £15 billion to £25 billion would include more banks that operate simple business models within the scope of the simpler firm regime and more quickly. This increased threshold would align with the top end of the asset size test (£15-25 billion), above which firms must raise MREL. While this would extend the simpler firm regime to a handful of extra firms, it is exactly this cohort of banks that are best placed to provide competition to UK systemic banks, with all the benefit of greater customer choice and increased innovation this could bring.

Consequently, we fully support the PRA’s proposals. However, we encourage it to be more ambitious by raising the asset ceiling and introducing the simpler firm regime sooner.

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