The room was absolutely jam-packed with staff from the PRA and the wider Bank – standing room only, in fact if one more person had entered it would have been a clear health and safety breach. My colleague Vicky Saporta was in the Chair, and this was a tough job: arguments raged, data was questioned, competing views were offered and challenged. Why so much excitement at the PRA? After all, boring is good in our line of work. Were we perhaps having our own private Brexit debate, with Vicky in the role of speaker? Were we changing our pension scheme, which is in my experience the only topic that gets people hotter under the collar than Brexit? Or were we picking next year’s Charity of the Year? None of the above. This was a meeting on what we call “horizon-scanning”, which we have made a strategic priority for the PRA as we come out of the post-crisis reform period. What is this activity? Why have we made it a priority? And why does it generate so much interest from our staff? This part of our work has its origins in two simple observations about financial history. The first is that crashes and financial crises are an enduring phenomenon 1. The second is that as memories of the most recent crisis fade, market participants often gravitate back to bad practices, sometimes in a new-fangled form, leading to the next crash.
In this sense, just as the leveraged lending issue is akin to the UK mortgage risking-up issue, these margin loans have an echo of the problems we’ve been tackling on capitalisation of equity-release mortgages – complexity creates a weakness in the system. Another area our scanners are always interested in is the border zone between different industries – and in our case, in particular the border zone between banking and insurance, given we oversee both of these industries. There are a number of cross-border activities which we are keeping an eye on. One is the use of credit insurance to optimise capital positions of banks. This is a perfectly legitimate business and not one that we object to on either side of the border. But we do of course need to be satisfied that a risk which disappears from a bank’s capital requirement has genuinely been moved across the border 2, and that the receiving insurer is properly reserving and capitalising for that liability. Another area of interest is where insurers are taking on illiquid or structural risks from banks, for instance assuming the risk on long-dated inflation swaps. It is natural that some of these risks should gravitate towards the parts of the financial system which can bear them more efficiently. But we need to be sure that this isn’t just because regulation on one side of the border is missing something which has been captured on the other.