It’s all a question of judgment

The new Prudential Regulatory Authority’s “judgment-based” approach to banks’ culture and competence is welcomed by SIMON THOMPSON: “Our Chartered Banker Professional Standards help provide a framework within which regulators and banks can make these judgments.”

I’m greatly encouraged. Attending the Bank of England’s recent pre-launch conference to explain the approach of the new Prudential Regulatory Authority, I listened as Hector Sants, its chief executive-designate, told that senior City audience: “The role of regulators is to complement and promote the disciplines of the marketplace, not to substitute for them. The ultimate responsibility for managing a firm prudently rests with its management, board and shareholders.”

He reminded us that “the primary obligation to ensure a firm is prudently managed within its statutory obligations lies with the management, and in particular the board, not with the regulator”.

There is, of course, an important sting in Sants’ tail. The PRA’s central presumption will be that “regulators cannot rely on the judgment of the management of the firms they supervise, and must take their own view formed from their own analysis, of the significant issues which affect the safety and soundness of the firm”.

And this isn’t just a rhetorical distinction. It puts practical distance between the PRA and what Sants concedes was one of the key “false presumptions” of the FSA it replaces – namely that “senior management judgment and market discipline should not be questioned by supervisors”, who therefore focused too heavily on “the checking of systems and controls”.

This all very much reflects our Institute’s view, argued in our policy briefings and the pages of Chartered Banker (see The New Regulators, pp13-23), that responsibility for managing banks cannot be devolved, in effect, to a regulatory rulebook. All the rules we created didn’t prevent the recent crisis.

Directors and managers must take responsibility for the capital, liquidity, risk profile and culture of their institution – going beyond the rules where this would be prudent and professional. The PRA, it’s clear, will make judgments on the soundnessof a firm’s culture and managerial competence – an approach repeatedly stressed by speakers at the Bank of England conference.

Our Chartered Banker Professional Standards are designed precisely to help provide a framework within which regulators and banks can make these judgments. Our strategic approach is therefore very much aligned to the direction of regulatory travel in the UK and, increasingly, internationally.

Back to Regulars contents
Back to Magazine contents