PRA will have power to force business model changes

Andrew Bailey BBA Conference 2012 480
Andrew Bailey

The Prudential Regulation Authority will have the to power to force banks and building societies to change their business model if it is not satisfied that risks can be adequately managed or mitigated.

Under the new regulatory structure, the PRA, which is expected to launch in April, will require providers to submit projections of their future revenues, costs and impairments, which will then be used to determine whether the firm’s business model adequately shields it against any risks it might face.

Speaking at a seminar on the PRA’s approach to regulation in London this morning, FSA director of international UK banks division David Rule said the PRA will have the power to force firms to change their business models if necessary.

He said: “We are not going to be providing free consultancy here and we will not be giving management advice on how to enhance profitability. Our focus will be limited to forming a forward-looking view on the vulnerabilities that could put the safety and soundness of the firm at risk. It will be a very narrow perspective – do we think this business model is sustainable, do we think there are things here that could blow up the firm?

“That will inform our view of the adequacy of the risk mitigation the firm has in place, including risk management and the capital and liquidity buffers the firm has in place. And where we believe the risk cannot be managed or mitigated, we may require changes to the business model. That is part of the judgement-led approach to supervision.”

FSA director of domestic UK banks Sam Woods warned the PRA will maintain an intensive approach to regulation.

Woods said: “Those of you who worked in smaller institutions will remember there was huge a step-up in our activity at that time [when Northern Rock collapsed in 2008] and that was also a change for us. Looking forward, although perhaps the absolute plank of intensity might have come off a bit, I think we are largely still in that same world. That level of intensity is here to stay in the PRA model, we will not go back to where we were before.”

FSA managing director of prudential regulation Andrew Bailey (pictured) welcomed challenges to PRA judgements where firms do not agree with its decision.

He said: “Our judgements will, at times, bring us into dispute. We will be open to challenge on them, we must be transparent on them, you must hold us to account on them. But there will come a point where we will not negotiate and that must be clear.”