Sam describes the PRA’s goals as a strong and stable banking system with no taxpayers’ money spent on bailing out a PRA-regulated financial institution, and a resilient insurance sector which does not pass risks back to policyholders when they crystallise.
Sam says, ‘I think those goals are in sight, and the remaining path to them is now largely set. Therefore, while I cannot speak for other countries, my assessment is that here in the UK we have reached the end of the revolutionary period in which major reforms to prudential standards were required in response to the 2008 financial crisis. Of course, there is important work to finish off in Basel, and constant evolution will be necessary as firms and financial markets themselves evolve. No regime is or ever will be perfect, but I think the one we are settling on is a massive improvement on the old one.’
Recalling Zhou Enlai’s famous comment in 1972 on the impact of the Paris riots a few years before – originally mistaken as referring to the French Revolution of 1789 – Sam says it is ‘too early to say’ how business models will shape up in the future. ‘For insurers, the low-rate environment and persistent soft conditions in many segments of general insurance are creating real pressures. And judging from their persistent low profitability and price-to-book ratios, developing sustainable business models remains a major challenge for many banks.’
One important element of this is misconduct, ‘where the peak of the crisis for banks has arisen more slowly than the prudential crunch in 2008’, but it is only part of the picture. Sam points to a recent study by Sarin and Summers, highlighting the market metrics by which the banking system still looks fragile. He warns that ‘we would be unwise to ignore these signals’. Many banks have simply not yet adapted to the new prudential constraints or the lower-rate environment: ‘This is now a first-order issue for us as the PRA and FPC.’
Published on
26 October 2016
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