PRA’s approach to supervision of new and growing banks

How ‘new and growing’ banks are defined

The consultation paper CP9/20 ‘Non-systemic UK banks: the PRA’s approach to new and growing banks’, published in July 2020 and closed in October 2020, is relevant to UK banks that are:

• ‘New’, i.e. still in the mobilisation stage and therefore authorised with restrictions, or exited mobilisation in the past 12 months
• ‘Growing’, i.e. in the five first years post-authorisation without restrictions 
• Non-systemic, i.e. not designated as systemically important through the ‘other systemically important institutions’ identification process

The key proposed changes

The PRA has observed a number of issues and proposes to clarify its expectations with regards to new banks, as they grow and mature. In doing this, the PRA hopes to promote a positive regulatory relationship with those banks through open, constructive, and forward-looking communication.

New calculation methodology for the PRA buffer

The PRA has noticed inconsistent approaches in the calculation of the PRA capital buffer. It is currently based on wind down costs and it is proposed that new banks:

• Calculate that buffer as six months operating expenses
• Move onto a buffer set on a stress test basis at five years after authorisation, or when they reach profitability, whichever is the sooner

This could prove to be a disincentive to invest, as higher expenses lead to higher requirements. However, this is not the main concern of the regulator as financial stability remains their focus.

A solvent wind down plan at the point of authorisation

As the likelihood of failure may be higher during the early years of a bank’s development, new banks are expected to have and maintain credible and comprehensive recovery and solvent wind down plans. This is expected to minimise disruption and impact on financial stability and depositors, should they fail. This proposed requirement will need to be satisfied at the point of authorisation or upon exit from mobilisation.

A clearer path to maturity and profitability

The PRA has noticed that while efforts on getting authorised are significant, many new banks underestimate the subsequent development required to become a successful and established institution.

The PRA appreciates that new banks need time to build and demonstrate capabilities and expects them to gradually:

• Have a forward-looking approach to capital management, ensuring that planning capital injections are received sufficiently in advance to avoid entering buffers
• Strengthen governance and increase the independence of the Board as they mature
• Invest adequately in risk management and controls
• Develop their stress testing capabilities

Summary of the PRA’s expectations of banks as they mature

Is this a new approach?

CP9/20 is the follow-up of a joint publication of the Bank of England / FSA dated 2013: ‘A review of requirements for firms entering into or expanding in the banking sector’. Whilst there are not fundamental changes, the current PRA supervisory approach should be read in conjunction with the following existing documents:

•  The PRA’s approach to banking supervision, March 2018 version
•  The PRA/FCA joint review of requirements for firms entering into or expanding in the banking sector: one year on
•  The Supervisory Statement 31/15 on ICAAP and SREP
•  The Statement of Policy on methodologies for setting Pillar 2 capital

The PRA knows that banks may already meet the expectations set out in the above and the draft Supervisory Statement associated with CP9/20 and if this is the case, costs resulting from the proposals are likely be minimal.

References

• PRA’s Consultation Paper CP9/20
• PRA’s approach to banking supervision
• Bank of England / FSA joint publication, ‘A review of requirements for firms entering into or expanding in the banking sector’
• PRA/FCA joint review, ‘A review of requirements for firms entering into or expanding in the banking sector: one year on’
• Supervisory Statement 31/15 on ICAAP and SREP
• Statement of Policy on methodologies for setting Pillar 2 capital