One of the most senior figures at the Bank of England has warned that some banks are involved in accounting practices that amount to “pure regulatory arbitrage”.
Sam Woods, deputy governor and chief executive at the Prudential Regulation Authority, the body set up to supervise the UK’s banks, said it was up to boards of directors to ensure their institutions were complying with the “spirit of regulation”.
In a speech on Monday, Woods said: “Whilst we, as supervisors, may identify issues that warrant further investigation, we will not spot everything. Ultimately, it remains the responsibility of senior managers and boards of directors to identify and mitigate the risk that firms are not complying with the spirit of the regulation.
“Indeed, we hold industry to account for its compliance with the Fundamental Rules and Senior (Insurance) Managers Regime, just as much as we hold it to account for its compliance with the detail of our regulations.”
Woods identified a number of examples where arbitrage had been spotted. These included the use of off-balance sheet financing that doesn’t attract a capital charge; the treatment of liquid assets; and the management of funding through special “liquidity horizons” so that it has little impact on regulatory liquidity requirements.
In a speech at the Building Society Association, Woods said that the UK is “living through a vital moment in supervision”.
“This has been a busy time but it is clear to me that this period is now drawing to a close, with the major remaining implementation tasks now narrowed to ring-fencing and bail-in debt.
“Instead of designing and implementing reforms, the job of supervisors becomes one of guarding them and holding the line.”