Keep it strong and simple

UK Finance, and its predecessor organisations, has long advocated the merits of a more proportionate regulatory regime for non-systemic banks and building societies. So it was good to hear the recent speech from Vicky Saporta, Executive Director of Prudential Policy Directorate at the Bank of England, setting out proposals for a new more nuanced, strong yet simple, prudential regime to safeguard the stability of the UK's financial system whilst not imposing undue burdens on institutions.

The Prudential Regulation Authority (PRA) is moving from being an ?EU rule taker? to ?UK rule maker? for most areas of prudential policy. This will entail a fundamental increase in the PRA's responsibilities, as described in HM Treasury's 2020 policy statement. The PRA has set out its thoughts about a new framework in a discussion paper which asks the industry for feedback on possible approaches.

Deciding the scope of the framework is fundamental. Eligibility could be based on a size criterion (e.g. total assets), as well as the simplicity of operations. It is likely that firms which are internationally active will be out of scope as they will remain subject to Basel standards. A balance will need to be struck between simplicity, for instance avoiding barriers to entry whilst ensuring the continuing resilience of firms.

The order of implementation is also a key decision. Should the smallest institutions be transitioned to a new approach first, before moving up the size ladder, or should there be a graduated approach applicable to all simultaneously?

The balance between simplicity and calibration is a key theme of the paper. A focused approach (essentially starting with a blank page) would impose the fewest requirements, but may have to be conservatively calibrated, initially at least, in order to ensure resilience. Alternatively, a streamlined approach (striking out of the Rulebook what is not needed) would lead to a less conservative calibration, but more complex requirements. Vicky's speech cited capital and liquidity as examples of areas which may need a different approach, highlighting again the need to manage trade-offs.

There are many other issues that will need to be decided in what is a key policy issue and which be critical to the future regulation of the industry. The PRA has said that it has ?an open mind about what options we might choose?. UK Finance will be responding to the discussion paper, which offers banks and building societies a once in a generation opportunity to help shape a regulatory framework that works for all industry participants.

The deadline for comments is 9 July. Please get in touch with Simon Hills or Robert Driver if you would like to contribute to the response.