Prudential Regulation Authority Rulebook

6.1

As banks move beyond five years of operation and transition out of the ‘growing’ phase and into ‘established’ bank status, the PRA expects banks to reach a level of maturity where they can confidently demonstrate that they have a settled business model, are profitable or have a credible strategy to achieve profitability supported by capital, a fully embedded risk management framework, and a well-developed governance structure.

6.2

Many banks operate without meriting a change in supervisory or preferred resolution strategy by maintaining relatively static risk profiles. The PRA does not have a preference as to where a bank chooses to define its risk appetite. The PRA is primarily focussed on the potential impact a bank might have on financial stability along with its financial resources and its ability to maintain an appropriate governance and risk management framework to match its chosen risk appetite. At certain points in a bank’s growth, regulatory requirements increase and banks can expect to be captured by more policy thresholds including those listed in Table 4. It is the bank’s responsibility to monitor the various policy thresholds and ensure that the firm is able to meet those requirements.

6.3

Many banks choose to change their risk appetites and adjust their business models as they develop. The PRA is not averse to such business decisions and recognises the rationale for such moves. However, a key aspect to a positive regulatory relationship is being open with the PRA about intentions to adjust risk profiles. Any such changes should be well thought through and communicated to the PRA in a timely manner. Through this approach the PRA can provide feedback where appropriate and be aware of a bank’s anticipated change, adjusting its expectations and approach accordingly. Both parties benefit strongly from such an approach.

6.4

It is in cases where banks have not been open with the regulators, have not anticipated the need to increase control requirements, and not demonstrated the capability to apply these controls that the PRA has needed to implement its enforcement or statutory supervisory powers.^[73] This could include varying an authorised bank’s permissions or requiring a bank to undertake or stop an action.

6.5

The PRA has aimed to design its regulatory approach in a proportionate manner. Accordingly, as banks increase the scale and complexity of their operations, it is likely they will have greater impact on financial stability creating a greater regulatory responsibility.

6.6

The PRA includes thresholds in policies which are designed to ensure that regulations are only applied to firms when necessary (table 3). It is important for banks to anticipate within their business plans when they expect to be captured by regulatory thresholds and measure the impact. When a material impact is projected this should be discussed with the PRA. This open dialogue benefits both the PRA and the banks it supervises through avoiding unnecessary surprises and unintended consequences. It is also in keeping with the PRA’s aim to be forward looking. As set out in the approach documents, when established banks increase their financial stability impact (which might be consistent with them being captured by an increasing number of regulatory thresholds) the PRA and the Bank will also consider proportionately increasing its respective supervisory and resolution planning intensity.

6.7

In recognising the impact of some of these regulatory requirements, the PRA has taken action to ensure any transition is proportionate and not unduly burdensome. In addition, the PRA regularly considers the impact of regulatory policy, implementing adjustments where policies do not achieve their intended objective. For example the PRA has taken various steps, to mitigate aspects of the capital regime which have been regarded as disadvantageous for non-systemic banks. The PRA publishes an annual competition report where greater detail can be found regarding these initiatives.^[74] Such actions have included:

• Introducing the updated P2A refined approach to Pillar 2A capital; and ^{[75] [76]}
• Implementing policies to facilitate internal rating based (IRB) model applications from smaller banks.^{[77] [78]} 

6.8

The PRA is committed to executing its duties in line with its objectives. The PRA welcomes feedback regarding the impact of its policies and supervisory approach on banks. The PRA further welcomes proposals from banks regarding how the PRA can best achieve its objectives. While it is banks’ responsibility to navigate their own challenges, the PRA is committed to being open to working with banks to find solutions to overcome difficulties including being willing to adapt its supervisory approach where a solution is in line with its objectives.

Table 4: A sample of PRA regulatory thresholds

6.9

Detail on the Bank’s indicative thresholds to set preferred resolution strategies and MREL requirements can be found in the Bank’s approach to resolution.^[91] In addition, thresholds for reporting under the Resolvability Assessment Framework can be found in the PRA RAF SS 4/19 ’Resolution assessment and public disclosure by firms’.^[92]