On 1st April 2013 prudential regulation came under the responsibility of the PRA. This covers 1,700 firms with resources focused on category 1 and 2 firms. It’s at an early stage but you have to ask whether there are going to be significant changes and whether they will affect you.
From the speeches and documents released it seems that the PRA would like to alter things. Although the crisis is far from over, (rates at 0.50%), groundwork is being prepared to move forward. My guess is we are moving to a more qualitative regime backed up with quantitative analysis. It is this human content that is both interesting and difficult.
From what I see the PRA is gearing up to engage Boards on a host of issues concerning structure, reporting, observation, feedback and accountability. Indeed the precursor document published in the BEQB Q4 2012 mentions some of these concerns. They include vulnerability of the NII, awareness of creating systemic risk and transparency of structure. All this should mean good governance will count.
Whilst regulatory reporting and peer group analysis will remain an important regulatory tool more will be asked about the medium term health of firms. Are you viable? Are returns sufficient? Are earnings of quality? Where are you going?
Of course kicking the tyres in this way presents management with a challenge but just how far is the PRA prepared to go?
That is not clear. I suspect that if the PRA doesn’t like what it sees it will stifle the firm either by way of prohibition or by more subtle increases in capital and liquidity. And that’s the risk for boards - you simply can’t grow your business.
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