Banking Industry Faces Regulatory Challenges as Prudential Authority Sets New Limits on Large Exposures

Introduction

The Prudential Regulation Authority (PRA) has introduced new limits on large exposures for banks in the UK, aimed at mitigating risks and ensuring financial stability. The changes are designed to apply a tighter limit on exposures to certain non-financial corporations in France.

New Limits on Large Exposures

According to Policy Statement 14/18, published by the PRA in June 2018, the authority sets out updates to its Large Exposures framework, which includes new rules for reporting large exposures and supervisory guidance. The statement also provides a simplified worked example of how the limits apply to UK consolidated groups.

Ring-Fencing Requirements

The new measures aim to curb excessive risk-taking by banks, particularly those identified as globally systemically important institutions (G-SIIs) or other systemically important institutions under the Capital Requirements Directive IV. Under the new rules, banks with a three-year average core deposit balance of more than £25 billion are required to separate their core retail banking services from their investment and international banking activities.

Concerns about Regulation Impact

However, industry experts have raised concerns about the impact of these regulations on foreign banks entering or expanding into the UK market. The additional regulatory costs and compliance requirements may deter international players from investing in the country, potentially leading to a reduction in competition.

Regulatory Framework for Cryptoassets

Another challenge facing the banking industry is the regulatory framework for cryptoassets. While some countries have introduced specific regulations, others have taken a more cautious approach. The Basel Committee on Banking Supervision has expressed concerns about the potential risks posed by cryptoassets and has set out its prudential expectations for banks’ exposures to these assets.

PRA’s Latest Consultation Paper

The PRA’s latest consultation paper, CP15/19, proposes applying a tighter limit on large exposures to certain French non-financial corporations in reciprocation of France’s similar measure. The deadline for comments was September 6, 2019.

Review of Ring-Fencing Regime

In its review of the ring-fencing regime, a panel reporting to the Treasury will examine the practical implications of implementing the regulations and assess competition in the sector. The review is expected to be completed by February 2022.

Conclusion

The banking industry faces significant regulatory challenges as it navigates the complexities of large exposures, cryptoassets, and ring-fencing requirements. As the PRA continues to set new limits on large exposures, banks must adapt to these changes while also addressing the broader regulatory landscape.

Key Points:

• The PRA has introduced new limits on large exposures for banks in the UK
• The changes aim to mitigate risks and ensure financial stability
• Banks with a three-year average core deposit balance of more than £25 billion are required to separate their core retail banking services from their investment and international banking activities
• Industry experts have raised concerns about the impact of these regulations on foreign banks entering or expanding into the UK market
• The regulatory framework for cryptoassets is another challenge facing the banking industry
• The PRA’s latest consultation paper proposes applying a tighter limit on large exposures to certain French non-financial corporations