The U.K.’s new banking regulator must explain to a panel of British lawmakers how it intends to monitor and restrict lenders’ proprietary trading.
Prudential Regulation Authority Chief Executive Officer Andrew Bailey should outline how he intends to monitor banks’ trading on their own account, what regulatory actions could be taken and whether the supervisor needs changes to the existing rules to “carry out these actions,” the Parliamentary Commission on Banking Standards said in a letter dated March 28.
The panel on March 15 stopped short of immediately recommending a ban similar to that required under the U.S. Volcker rule, citing the difficulties of separating proprietary trading and customer market making. Regulators should “bear down” on banks’ proprietary trading and review the case for an outright ban within three years, the commission said.
“Many banks told the commission that, at present, they do not engage in proprietary trading, nor do they wish to do so,” Andrew Tyrie, the Conservative lawmaker who heads the commission, said in an e-mailed statement today. “The PRA must exercise its judgment. It should hold the banks to their word.”
The PRA, a unit of the Bank of England, took over banking supervision from the Financial Services Authority this week as part of an overhaul of the U.K.’s regulatory system. The Financial Conduct Authority, another new regulator, will be responsible for market abuse and consumer issues.
Proprietary trading, where traders use a bank’s capital to make independent bets on the direction of securities, generated an increasing proportion of bank profits before 2007 and may have contributed to the financial crisis by pitting traders against their clients and promoting a culture of excessive short-term remuneration, the panel said in its March report.
“The PRA and its Board will be considering the details of the letter and will be responding to the committee directly in due course regarding this important issue,” Liam Parker, a spokesman for the PRA, said in an e-mailed statement.
“In a few years, we will be in a much better position to decide what, if any, further action should be taken,” Tyrie said. “We will also be able to benefit from the experiences of other jurisdictions currently attempting to define and enforce a ban on proprietary trading.”
The parliamentary commission was set up by Chancellor of the Exchequer George Osborne last year to review the government’s plans to overhaul how Britain’s banks are regulated after taxpayers were forced to bail out Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. The panel has already called on Osborne to toughen plans to force lenders to erect firewalls around banks’ consumer units.
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