The Prudential Regulation Authority is to abandon the FSA’s Arrow approach to banking regulation in favour of a more intrusive risk-based governance.
Speaking at the launch of a briefing document on the current thinking about future prudential regulation of banks, PRA deputy chief executive designate Andrew Bailey laid out the key areas it will consider.
He said: “The potential impact on the financial system of a firm coming under stress or failing, the impact of the macroeconomic and business risk context on the viability of a firm’s business model and a firm’s overall safety and soundness, which may act to mitigate the potential risk a firm poses to financial stability.”
Under the new Proactive Intervention Framework, banks will be categorised according to the severity of risk to the system their particular circumstances pose with certain regulatory actions associated with each of the five stages.
The PRA will also investigate how easily an institution can be wound down in the event of failure, its financial strength and its risk management and governance, including the competence of senior management.
It may require a firm to change its business model or hold greater capital buffers if it thinks it will decrease the chances of a firm’s failure, however PRA chief executive designate Hector Sants stressed allowing companies to fail is a necessary part of a healthy system.
Along with the Financial Conduct Authority and the Financial Policy Committee, the PRA is proposed to begin operating at the end of 2012 and the PRA’s approach to regulating the insurance sector will be covered at another event later in the year.
Sants said each major firm will have a dedicated supervisor and all deposit-taking institutions will have “baseline supervision” with the aim of ensuring the regulator becomes aware of problems and can work with the firm to solve them before they pose a risk to the firm.
Bailey said: “In order to deliver its new approach, the PRA will be staffed by highly qualified teams with strong analytical skills and experience in supervision.”
Sants admitted the PRA will face a challenge trying to recruit such highly qualified staff when they could earn many times more in other roles.
He said: “It is not, however, an impossible task. Individuals can be found who recognise the rewarding nature of the role in the wider sense and are attracted to the concept of public service. The PRA will, however, need to be imaginative in its employment offering and seek to reach out to a diverse and different pool of individuals than are traditionally attracted to the city.”