British banking watchdogs will increase their scrutiny of firms looking for regulatory loopholes, according to the Bank of England’s top regulator.
Sam Woods, the bank’s deputy governor for prudential regulation and the head of the Prudential Regulation Authority (PRA), said supervisors will take a close look at firms they think are breaking the “spirit of the law”.
Some lenders have been guilty of “pure regulatory arbitrage” masquerading as “innovation”, Woods warned.
He said: “Firms should be prepared to defend their compliance, not only with the letter of the regulation, but also with our principles of prudence, effective risk management and adequacy of financial resources at all times.”
In remarks prepared for the May 2017 Building Society Association (BSA) annual conference in May but delayed because of the General Election announcement in April, Woods today fired a warning shot over the bows of banks looking to take on more risk without complying properly with regulation.
The PRA is concerned about a growing trend of banks moving leverage off their balance sheets, which can leave firms more exposed when conditions worsen than is superficially obvious. Woods also noted issues around the values ascribed to regularly traded assets, which might not take into account losses in time.
Meanwhile, the PRA has also seen a trend of mortgage lenders increasing the length of their loans, which could “store up a problem for the future” if borrowers face tighter conditions.
The Bank of England warned recently that some forms of lending are starting to look overheated, with consumer lending in the auto finance sector a particular concern. Woods serves on the Bank’s financial policy committee (FPC), which last month raised the amount of capital lenders must hold in case of a market downturn.
Banks will be forced to increase their so-called countercyclical capital buffer to one per cent of assets by November 2018, making them hold another £11.4bn in capital. The buffer aims to make banks build up assets during good times in preparation for a crash, when they can use up the extra breathing space.
Today Woods warned that “financial institutions will always be able to innovate faster than we are able to modify the prudential rulebook”, but added the PRA will act to adjust regulation if it can “smell [...] something is off”.
Brexit will also be a “key risk” which could “warrant supervisory attention” if firms’ business models change, Woods said, although he added it will not change the PRA’s overall approach.