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The levels of application of prudential requirements: a comparative perspective

Author

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  • McPhilemy, Samuel

    (Bank of England)

  • Vaughan, Rory

    (Bank of England)

Abstract

International standards for banking regulation leave individual countries with discretion to determine how the separate legal entities within a banking group should be brought together for the purposes of prudential regulation and supervision. This paper documents differences in the levels of application of prudential requirements drawing on a survey of national rules and regulations in eight jurisdictions. Most jurisdictions apply prudential requirements on a consolidated basis, meaning that they require groups to meet standards for minimum capital and liquidity adequacy as if they constituted a single financial unit. However, consolidated requirements do not account for potential impediments to the transferability of financial resources within banking groups. Reflecting this, international banking standards suggest prudential requirements should be applied also at lower levels. The Basel Accord sets out two alternatives for applying prudential requirements beneath the consolidated level: solo application and sub-consolidation. Solo application involves applying prudential standards to individual operating banks within a group, as if those banks were separate standalone entities; sub-consolidation involves regulating sub-groupings of entities as if those sub-groupings were themselves a single financial unit. These approaches have differing implications with respect to the allocation of financial resources across the legal entities within banking groups. However, in practice different jurisdictions arrive at similar outcomes through their differentiated application of certain other regulations, notably restrictions on intragroup exposures. The final part of the paper considers how forthcoming standards on bank resolution affect the economic rationales for sub-consolidated and solo application of prudential requirements.

Suggested Citation

  • McPhilemy, Samuel & Vaughan, Rory, 2016. "The levels of application of prudential requirements: a comparative perspective," Bank of England working papers 625, Bank of England.
  • Handle: RePEc:boe:boeewp:0625
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    More about this item

    Keywords

    Banks; regulation; scope of regulatory consolidation; solo requirements; sub-consolidation levels of application.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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