RPC members warn prudential regulation should not be watered down in quest for growth

Two members of the Bank of England’s Regulatory Policy Committee (RPC) have warned lawmakers that prudential regulations should not be weakened in the pursuit of economic growth.

Andrea Enria and David Soanes were giving evidence to the Treasury Committee this week following their nominations to the RPC.

Enria, a former chair of the European Central Bank (ECB) supervisory board, said he would view it “very negatively” if competitiveness were achieved by a race to the bottom in terms of prudential standards because this would not support long-term growth.

The former chair of both the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) added that strong prudential requirements in line with international standards were fundamental to supporting growth.

Looking at what has happened in the US in the last 10 years, he said, “you have had an extraordinary performance in terms of growth and you have had capital requirements which have been gold plated with additional layers on top of the international standards”.

However, in the European Union “there have been deviations from the international standards, watering down of requirements in certain areas to support lending to certain counterparts, and the growth performance has not been as strong. So I think that strong capital requirements are supportive of growth”.

Soanes, a former UK country head at Swiss bank UBS, advised the UK government during the 2008 financial crisis. He said financial firms had benefited from the increased regulation that followed, as it had helped to shore up public trust and enhance their credibility.  

Last year, UK chancellor Rachel Reeves said that the 2008 financial reforms may have gone too far.

Thicket of regulations

Soanes told the committee he did not think banks had a “great appetite” for reducing capital requirements, especially given the Covid-19 pandemic and the ongoing war in Ukraine, but said there was scope for some trimming of the “thicket” of post-crisis regulations in areas such as reporting requirements and the senior manager and certification regime.

Enria said the financial crisis had delivered a “very complex regulatory environment”, which was also complicated for supervisors to navigate. He could see some room to simplify requirements and look at the compliance costs they created for firms, he added.

Asked if he thought the Prudential Regulation Authority (PRA) should have fewer “have regards to”, Soanes said it was up to Parliament to decide which, if any, of the 25 “have regards to” should be removed.

“Have regards to” are instructions to regulators set in legislation requiring them to consider a specific thing, such as the Government’s commitment to Net Zero, when setting policy or financial rules.

EU/UK comparisons

Committee member Harriett Baldwin asked Enria how UK banking supervision compared to the EU. According to Enria, the ECB and Bank of England collaborated well.

“What I appreciate very much in the Bank of England/PRA approach to supervision is the strong reliance on supervisory judgment,” he said. “At the European level, there is more of a rules-based approach, which sometimes leads to supervisory tick-box practices. I made a lot of effort when I was at the ECB to try to push the practices of the ECB towards more judgment-driven assessments, in line with what is done here at the Bank of England.”

A key strength of the ECB was that it could send an independent team of supervisors on-site into banks that could also assess valuations, he added. “Thatʼs particularly useful as an instrument when you are at the stage of the credit cycle [that we are now], when maybe banks might be underestimating credit risk and so going into the details of valuations could be particularly important.”