The Prudential Regulation Authority's (PRA's) first consultation paper on UK bank ring-fencing puts the ball back in industry's court, holding back from extensive prescription in favour of an approach which gives banks some leeway to tailor solutions to their business models. In most areas there will not be a 'one size fits all' approach, and the onus will be on individual banks to demonstrate how their plans comply with legislation and the PRA's objectives.
The paper confirms the PRA's approach along a number of dimensions, though few components will strike seasoned ring-fence watchers as entirely new or unexpected. While the paper does not provide all the answers to the many open questions which remain, it does provide a set of parameters within which firms can undertake further work. The process of implementing ring-fencing will be evolutionary, and despite asking for preliminary plans to be submitted by the turn of the year, the PRA recognises that those plans may change as it provides further details of the regime.
PRA rules provide the third layer of detail designed to transform ring-fencing from high level policy to a practicable framework, following finalisation of the Banking Reform Act in December 2013 and several pieces of secondary legislation in summer 2014. Uncertainty about the PRA's stance on design-critical issues such as governance frameworks, sibling structures, and shared services had made further planning difficult, but some of that uncertainty has now been eliminated.
Given that many UK banks over the £25 billion deposit threshold have been engaged in some degree of planning over the last few years, the three month deadline to produce provisional plans should be manageable. But it will necessitate a transition in banks' planning from the exploration of options to the taking of decisions. These plans will need to include anticipated legal and operating structures, with provisional balance sheets and profit and loss statements, as well as clear project governance arrangements. And although January's submissions will be preliminary, the 1 January 2019 implementation deadline means that they cannot be preliminary for too much longer. The journey to ring-fencing will likely be long and arduous, but the PRA's new paper provides a firm push forward.
The paper should also be read in conjunction with the PRA's new discussion paper on operational continuity in resolution, although the focus of what follows is on ring-fencing.