Pure and simple: Which challenger banks could benefit from lighter-touch rules?

Simple is a word rarely associated with prudential regulation. But the idea is starting to take hold that UK capital requirements could be simplified, at least for new and growing banks. The Prudential Regulation Authority is working on a “strong and simple” prudential framework for non-systemic banks and building societies and has now suggested criteria to determine which firms stand to benefit from that simpler regime.

In a consultation paper, the PRA introduces the definition of “Simpler-regime Firm”. The simpler regime is intended for smaller, less complex firms which are focused on deposit-taking and retail and commercial lending in the UK. For example, under the PRA’s proposals, to be a Simple-regime Firm you would have to:

• have no more than £15bn in assets,
• have no more than a minimal trading book,
• not provide certain activities, such as clearing and settlement, custody, or correspondent banking, and
• have limited banking activity outside the UK.

The PRA reckons that there are 61 firms which would be Simpler-regime Firms under this definition. This represents 30% of UK banks and building societies but a relatively small share of the UK banking sector, according to the PRA. The hope is that the simpler regime will boost competition by reducing costs on small firms and encouraging others to enter the UK banking sector.

The deadline for responding to the consultation is 22 July 2022 and the PRA plans to finalise its approach by early 2023. This is only the first step towards creating the simpler regime. Once the definition is settled, the PRA will consult on the liquidity requirements and other aspects of the simpler regime and follow that up with another consultation on capital requirements. There is still some time to go before prudential regulation becomes simple.

Upcoming timeline

• 22 July 2022 – deadline for responding to PRA CP5/22
• Late 2022 / early 2023 – PRA to finalise position on definition
• 2023 – PRA to consult on liquidity requirements and other aspects of the simpler regime
• 2024 – PRA to consult on capital requirements