The Prudential Regulation Authority Mark Pickering

We are all quite familiar with the Bank of England’s Monetary Policy Committee, the MPC but the PRA is probably below the radar of many. As Treasury Managers we are well versed in the concept of prudence, and this insight aims to shed a little light onto the Bank of England’s Prudential Regulation Authority (PRA) and at a very high level, what it does.

In 2012 the Financial Services Act (2012) brought the PRA into being and designated its remit and objectives. Headed by New Zealand born Sam Woods, it is responsible for the prudential regulation and oversight of around 1,700 banks, building societies, and other financial firms. The PRA has three statutory objectives:

  • a general objective to promote the safety and soundness of the firms it regulates;
  • an objective specific to insurance firms, to contribute to the securing of an appropriate degree of protection for those who are or may become insurance policyholders; and
  • a secondary objective to facilitate effective competition.

The MPC has its key tools of interest rate and quantitative easing, where the PRA has more qualitative tools at its disposal. Namely expectation setting through policies it expects firms to meet, and a supervisory regime whose aim is to assess the risks that a firm poses to the PRA meeting its objectives.  If a threat is identified then the PRA will take action where necessary to mitigate these.

The PRA wants to avoid failure of a single institution leading to a collapse of the financial system as a whole, this flowed from the perilous position regulators identified in the wake of the credit crunch and ensuing global financial crash.

Aiming to look into the future, to be forward looking, the PRA has adopted a regime of stress tests for banks. The 2016 stress tests were conducted on the 7 largest UK Banks and Building societies that between them account for over 80% of lending in the UK.

The stress tests on these 7 banks took account of a 5 year macroeconomic shock, a traded risk shock and a misconduct impact. The kind of scenarios included, but were not limited to, a 31% fall in UK residential property prices, a 4.5% increase in UK unemployment and a 4.3% drop in UK GDP…quite a lot of stress. If you want to learn more then click here.

The results of the most recent stress tests are due by the end of the month, and Arlingclose will report on their findings in due course.