LONDON Oct 22 Britain's banks will have to
provide detailed forecasts to a new supervisor which can then
order them to change their business models or raise more
capital, ending the "light touch" regulation of before the
2007-9 financial crisis.
Britain's Prudential Regulation Authority (PRA), based at
the Bank of England, will be launched on April 1 to oversee
banks as part of a shake-up of regulation aimed at preventing a
repeat of the taxpayer bailout of banks during the crisis.
The current Financial Services Authority (FSA) will be
scrapped and its remaining enforcement and market supervision
activities transferred to a new standalone Financial Conduct
"We need to spend more time looking closely at business
models, asking questions such as where does the firm make money
and is this sustainable," said Andrew Bailey, head of banking
supervision at the FSA and a leading candidate to head the new
Bailey was telling a public meeting how the PRA will work
differently from the FSA, taking a forward looking,
judgement-led approach to draw a line under the "light touch"
and "box ticking" style of previous supervision.
The PRA may not always get it right first time.
Bailey said regulators were still grappling with finding the
right trade off between how much capital banks should hold to
stay resilient, while not hindering their ability to lend to the
"Fitting those two together is not easy, but is crucial,"
David Rule, who will be a director at the PRA, said the new
watchdog will ask large banks for projections of their future
revenue, costs and impairments to see how they make money, and
whether their growth objectives are sustainable and based on a
Regulators want to end years of mis-selling where lenders
relied on a few very profitable products that were unsuitable
for many people.
"We won't be providing free consultancy here. Our focus will
be limited to forward looking views of safety and soundness. Do
we think this business model is sustainable? Do we think there
are things that could blow up the firm?" Rule said.
"Where we believe that risks cannot be adequately managed or
mitigated, we may require changes to the business model, for
example steps to reduce excessive concentration of risk," Rule
The boards of banks will be directly responsible for
ensuring there is enough capital and liquidity reserves and the
PRA will not depend on a bank's own internal models for
calculating how much capital should be held.
"We will look at those models somewhat sceptically. We will
expect models to be appropriately conservative," Rule said,
adding the PRA would ask for changes to the in-house models if
they were not realistic enough.
The PRA will also actively use its discretion to require
"floors" for some capital requirements, meaning a default sum of
capital whatever the risk model comes up with.
Banks could also be required top up capital on exposures to
interest rates or pensions if they are not adequately covered by
a bank's basic capital reserves. The PRA will also consider
using a cap on balance sheets, known as a leverage ratio, he