Prudential Regulation Authority (2020), Supervisory Statement 2/16: The Prudential Regulation of Credit Unions – https://www.bankofengland.co.uk/prudential-regulation/publication/2016/the-prudential-regulation-of-credit-unions-ss 7  5  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  5  I mentioned earlier the scale of ring-fencing in the UK banking sector. As would be expected from such a significant change to the UK’s financial landscape, we have seen some wider impacts, in particular in the nature of competition for mortgages and the compression of lending margins in this market. Sam Woods mentioned in his speech to the Building Societies Association in May last year8 that mortgage risk-weights for large firms using internal models have been declining significantly over the last decade. And the average modelled mortgage risk-weight in the UK is lower than in many other jurisdictions. We have therefore been reviewing the implications of this, with an eye both to the safety and soundness of the larger firms using IRB models for mortgages, and to the competitive impact on other mortgage lenders using standardised risk weights. Our review includes the desirability of mortgage risk weight floors. And it is relevant to note in this context that others have already gone down this path – both Finland and Sweden have implemented portfolio floors at 15% and 25% respectively. Our hope is that in combination with other measures, including stress testing and the refined Pillar 2A approach I mentioned earlier, we might reduce unwarranted benefits from internal models.
Different parts of the climb will be more relevant to different banks at different stages of their journey, and indeed to different business models and sectors. New subsidiaries of international firms may be able to take a path well-trodden by their Group, for example. (When I say ‘bank’ I am of course speaking loosely as we regulate banks – both UK based and the UK operations of those based overseas – building societies and credit unions.) Whatever the firm, an important part of the financial sector’s resilience is its ability to grow safely, and to respond to and to recover from stress. To support that, the regulator needs to be clear in setting out what is expected so that each bank can make business plans for when things go well and contingency plans for when things go wrong. And banks need to be able to do so safe in the knowledge that the regulatory path up the mountain is clearly mapped out, and that there is a way back onto the path – or indeed off the mountain – should they stumble. 5  The PRA has authorised 50 new entities in total since its creation in 2013, including subsidiaries and branches of overseas banks and entities established as part of ring-fencing.