Committees

Correspondence with Prudential Regulation Authority released

7 June 2016

Rt Hon. Andrew Tyrie MP, Chairman of the Treasury Committee, has written to Andrew Bailey, Chief Executive of the Prudential Regulation Authority, to highlight the Committee's concerns about whether the right balance is being struck in terms of the amount of public disclosure of supervisory information.

Chair's comments

Commenting on the correspondence, Mr Tyrie said:

"Market discipline was found to be severely lacking prior to the financial crisis. Investors were not just ignorant of the risks on bank balance sheets, but content to be. Many were narrowly focused on encouraging banks to generate high returns, supported by very high levels of gearing. But even those investors who tried to identify those risks were unsighted, and often had scarcely any information available to work from.

Effective market discipline should be a priority for regulators. For this a high degree of transparency is required. Risks on bank balance sheets need to be visible. Regulators collect a great deal of information valuable to an effective assessment of these risks. But it is not available to shareholders, creditors and depositors, the people with most 'skin in the game'.

Parliament and the public rely on regulators to do their job properly and acquire a deep understanding of the main sources of bank risk. This in turn requires trust between regulators and firms. Firms need to be confident that commercially confidential information provided to the regulator does not end up with the competition. Nonetheless, a primary tool of regulation is – and should be – market discipline. Markets require information to work properly. There may be occasions when regulators need to withhold information on financial stability grounds. But these are likely to be rare. The regulators need to ensure the maximum possible disclosure – consistent with the reasonable demands for commercial confidentiality – to markets and the public.

Some welcome progress has been made by the regulators in recent years. Retention of confidentiality may be justified in some areas – but it is now in the public interest that a full justification for it be spelt out in detail by regulators. What may be needed is a presumption of disclosure, supported by clarity and detail about the necessary exemptions."

Background

  • On 14 December 2015, the Chair of the Treasury Committee wrote to Andrew Bailey to ask the PRA to provide an assessment of the average capital ratios for incumbents versus new banking entrants.
  • On the 26 February 2016, Andrew Bailey responded in a letter to the Chair of the Treasury Committee. His letter notes that:

"The bottom line is that it is typical for there to be a difference in capital requirements between those institutions using internal modelling approaches (IRB) and those using the standardised capital approach (SA) which would be the more normal approach for a new entrant or smaller firm. However, it is important to note that the difference is not as large as is often suggested, particularly once other capital requirements, such as the leverage ratio, are taken into account. In addition, while IRB modelled capital requirements are often lower than the standardised approach, firms using modelled approaches are required to have more sophisticated risk management capabilities, which of course carry their own cost."

  • Mr Bailey also sent a separate letter on 6 January outlining what work the PRA had done in order to respond to certain recommendations in the PCBS's final report 'Changing banking for good':

The Commission endorses the good practice adopted by an increasing number of banks of publicly disclosing, and making widely available, the contents of their presentations to bondholders. The Commission encourages bondholders, where they are sufficiently concerned, to raise such issues publicly where practical. The PRA should examine the scope for extending bondholder influence of this type. (Paragraph 674, Vol II)

The Commission recommends that non-EU mandated regulatory returns be combined, with any other accounting requirements needed, to create a separate set of accounts for regulators according to specified, prudent principles set by the regulator. This second set of accounts should be externally audited and the Commission recommends that a statutory duty to regulators be placed upon auditors in respect of these accounts. Where there is a public interest for these accounts to be published, the regulator should have a legal power to direct that they (or where appropriate, abbreviated accounts) are included in the financial statements, alongside a reconciliation to the IFRS accounts. (Paragraph 1039, Vol II)

An enhanced auditor commentary would benefit investors and other users of financial statements. We welcome the IAASB's work to develop a model for best practice. However, we consider that subjective matters of valuation, risk and remuneration, amongst other key judgement areas, are so crucial to investors' understanding of a bank's business model that an upfront, independent opinion would be beneficial. The Commission therefore recommends inclusion of specific commentary on these areas in auditors' reports on banks' accounts. (Paragraph 1042, Vol II)

Further information

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