Banks will no longer need regulatory Arrow visits to determine their riskiness, but instead will need to satisfy a wide-ranging criteria under the new Prudential Regulatory Authority.
Banks will no longer be subject to regulatory Arrow visits to determine their riskiness but will have to satisfy a wide-ranging criteria under the new Prudential Regulatory Authority (PRA).
Speaking at the launch of a joint paper, The Bank of England, Prudential Regulatory Authority – Our approach to banking supervision, Hector Sants (pictured), chief executive of the FSA, said the purpose of the new regulator would be fundamentally different to the model that was in use post-financial crisis.
‘The new regulatory model will be based on forward looking judgements and will be underpinned by the fact that the PRA has a single objective to promote the stability of the UK financial system and in consequence will be a very focused organisation. The new supervisory approach will build on the more intensive approach adopted by the FSA since the crisis,’ said Sants.
In a speech by Andrew Bailey, executive director of the Bank of England, he set out how the PRA would risk assess large financial institutions, including some large investment companies.
The risk framework includes:
* Potential impact on the financial system of a firm coming under stress of failing
* The impact on the viability of a firm’s business model on the macroeconomic and business risk context
* Overall safety and soundness
* The degree of resolvability of firm
* Financial strength including ability to generate capital through earnings
* Capital held against future risks
* Quality of liquid assets and its liquidity management
* Quality of a firm’s risk management and governance
‘This new risk assessment framework will replace the FSA’s Arrow approach and seek to integrate the entire range of the PRA’s supervisory activities,’ said Bailey.
Risks will be identified through baseline monitoring, investigation and assurance.
Bailey added: ‘Our approach to risk assessment will be proportionate. This is a very important point in the new approach. Business models and resolvability analysis, as well as stress tests for small firms (such as credit unions) will be largely based on simple macroeconomic and sectoral risk profiling.
‘But the PRA will have to undertake a more intensive and idiosyncratic analysis of the business models of and potential stresses for large institutions.’