The Prudential Regulation Auth-ority will have the power to intervene directly in the running of companies in order to maintain financial stability.
Laying out his plans for the proposed approach of the PRA in London last week, chief executive designate Hector Sants said market discipline alone can no longer be trusted to provide financial stability.
The PRA’s powers will include the ability to vet bank directors and other top employees and limit bonus and dividend payouts. The regulator will also have the power to prevent companies from carrying out certain types of business or close them down completely if they pose a threat to financial stability. Sants said the “central premise” of regulation prior to the financial crisis, that market discipline can provide stability, has been discredited.
He said: “That has been shown to be at fault. Regulators cannot rely on the judgement of the management they supervise and must take their own view formed from analysis. Furthermore, where that judgement differs from that of the firm’s management, the regulator must act.”
Other tools at the regulator’s disposal include placing limits on balance sheet growth, leverage limits and the tightening of liquidity and capital requirements.
A joint FSA and Bank of England briefing document on the PRA, released at the launch, says the regulator’s approach will be “proportionate”, “forward looking” and focused on the “big picture”, with early intervention when risks are identified.
All firms will undergo “baseline supervision”, including annual reviews of their ability to fail without having an impact on financial stability.