As always, Sam Woods provides some thought-provoking perspectives in his recent speech to mark the five year anniversary of the Secondary Competition Objective (SCO) of the PRA.
Sam highlights the three key things that the PRA has achieved over the last three years:
a) Establishing the New Banks Unit to provide a nursery environment for new banks through the application process through to mobilisation. (You can read more on this in our recent blog series - Part 1, Part 2, Part 3 and Part 4.).
b) Levelling the playing field for capital by reducing the differences between standardised and modelled capital weightings, developing a holistic Pillar 2A approach to bank capital, introducing the modular approach to IRB applications and creation of the leverage ratio.
c) Establishment of a New Insurers Unit and a proportionate Non-Directive Firms regime for small insurers.
.…and some soul-searching
What I found particularly interesting is the set of seven questions Sam then proceeds to ask on a number of areas.
Four of the most important were:
a) Proportionality: How will the PRA continue to apply the proportionality for smaller/growing firms? This is something that we see a number of our clients challenged by as they try to meet the increasing demands on executive and non-executive time arising from regulatory pressures against business development and execution pressures. That the PRA is conscious of the challenges that firms face is comforting and should encourage them to have proactive dialogues with their supervisors in relation to their overall growth plans, in context of their prudential and conduct risks.
b) One for the industry: Despite 17 new UK banks being authorised since 2013, why has no bank become a successful large bank and a model template for aspiring firms? Current account stickiness can only explain a part of the problem. New banks and aspirants must introspect and consider responses – both through organic growth plans as well as inorganic strategies. Growth is often achieved through mergers and acquisitions and the PRA is conscious of achieving the balance between supporting growth and maintaining a competitive market place.
c) Risk-based supervision approach: Both big banks and smaller banks are subject to vulnerabilities and relative size cannot be seen as a proxy for inherent safety or stability. There is a constant need for the PRA to balance their safety and soundness objective with the competition objective, but it will take a close interest in large firms as well as small, especially if they are fast-growing, concentrated in higher-risk markets and untested in a downturn.
d) Brexit may provide an opportunity to allow a simpler regulatory approach for smaller firms – the EU consensus has tended to be to want a uniform approach to regulation across firms of all sizes, which tends to lead to a proportionately higher burden on smaller firms. Brexit may actually allow an opportunity to improve the competitive environment for new entrants and smaller firms.
Sam ends with a call to the industry to contribute to setting the agenda for the PRA for the future: “I am sure I can rely on the small bank lobby to do some stirring as well, and between us we will make further progress”.
I think it’s a vital signal that he has provided to the industry and banks should be proactive in seizing this call to engage a lot more actively with the regulators.
So to sum up: in my view the competition objective has had quite a profound impact on the PRA’s activities and approach over the last five years. We’ve done a lot, and our commitment to drive through the changes we’ve brought in is undimmed. But that’s not enough, and as we enter the second five years I’d like to stir up a vigorous debate about the next set of questions, some of which are really very awkward. I’m sure I can rely on the small bank lobby to do some vigorous stirring as well, and between us we will make further progress.