Prudential Regulation Authority: the future approach to banking supervision

The Bank of England (the Bank) and the Financial Services Authority (FSA) have today published a joint paper The Bank of England, Prudential Regulation Authority – Our approach to banking supervision setting out the current thinking on how the future Prudential Regulation Authority (PRA) will approach the supervision of banks, building societies, credit unions and investment firms.

Hector Sants, FSA chief executive and PRA chief executive designate, said:

“The PRA's purpose is fundamentally different from that of previous regulatory regimes and will lead to a significantly different model of supervision to that which was in use pre-2007. In designing this new model we have incorporated both the lessons learned from the last financial crisis and those from firm failures of the past.

“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.”

Andrew Bailey, FSA director of UK banks and building societies and PRA deputy chief executive designate, said:

“Maintaining financial stability is an objective in public policy which we should all value highly. We have seen what happens when we lose it. But achieving and maintaining financial stability does not mean that we have an industry in which no-one can fail.

“In order to deliver its objective of stability of the financial system, the PRA will use a new framework to assess risks to financial stability. This document sets out our thinking so far and aims to foster debate about the design of the PRA.”

The paper will be presented and discussed at a conference in London today for CEOs and senior managers of firms that will come under the PRA’s supervisory control.

Today’s paper outlines:

• the principles underlying the PRA’s approach;
• the scope of the PRA;
• the PRA’s risk assessment framework;
• the PRA’s forward looking, judgement-led approach to supervision;
• the approach to policy-making that will support the judgement-led model; and
• the approach to authorising firms and approving individuals.

The PRA will be responsible for supervising both insurance companies and deposit-takers. A companion paper will be published in June 2011 to cover the PRA’s approach to supervising insurance companies.