Chief Executive of the Prudential Regulation Authority (PRA), Andrew Bailey’s letter sets out the Bank of England’s position in favour of a differentiated regulatory approach, which would support financial stability while allowing a more proportionate approach to applying international standards to smaller banks and building societies.
The letter states that the PRA will review, in their first annual competition report, whether any changes can be made to the application process for institutions wanting to move onto the internal ratings based approach to risk-weighting to calculate their capital requirements. Big banks use internal models to work out the amount of capital they need to hold against particular assets, but newer and smaller banks often have to use the standardised model, which can require them to hold more capital against the same type of asset, meaning that they cannot grow as quickly. A key complaint of challenger banks and building societies has been that they face an unfair playing field on capital.
The Economic Secretary’s reply welcomes these initiatives, which are in line with the government’s objectives to promote greater competition in banking, and confirms that the Treasury will support this agenda both at home and abroad.