Overview
The Prudential Regulation Authority (PRA) is a regulatory body established in April 2013 as part of the Bank of England. It was created under the Financial Services Act 2012, which restructured the UK’s financial regulatory framework by dissolving the Financial Services Authority (FSA) and creating the PRA and the Financial Conduct Authority (FCA). The PRA focuses on the prudential regulation of specific types of financial institutions, including:
- Banks
- Building Societies
- Credit Unions
- Insurers
- Major Investment Firms
Objectives
The stated objective of the PRA is to:
- Promote the safety and soundness of financial institutions to ensure they can provide critical services without interruption.
- Contribute to securing an appropriate degree of protection for policyholders in the case of insurance firms.
- Support the stability of the UK financial system by minimizing systemic risks.
Key Responsibilities
The PRA’s primary responsibilities include:
- Setting prudential standards to strengthen financial institutions’ resilience.
- Supervising institutions to ensure they comply with these standards.
- Assessing risks and taking action to mitigate them.
- Working with other regulatory bodies to ensure coherent and effective oversight.
Structure
The PRA operates with a Board comprising senior representatives from the Bank of England and other financial industry experts. It works closely with other regulatory entities nationally and internationally to maintain a stable and secure financial environment.
Examples
- A Bank Under PRA Supervision: The PRA might oversee a major UK bank to ensure it has adequate capital reserves and liquidity to withstand financial shocks.
- Insurance Firm Regulation: An insurance company regulated by the PRA would need to hold sufficient capital to cover potential claims and protect policyholders.
- Credit Union Compliance: A credit union would be subject to PRA regulations requiring it to manage risks effectively and maintain financial stability.
Frequently Asked Questions (FAQs)
Q1: What is the primary goal of the PRA? A1: The primary goal of the PRA is to promote the safety and soundness of institutions and create a more resilient financial system.
Q2: How does the PRA differ from the Financial Conduct Authority (FCA)? A2: The PRA focuses on prudential regulation, ensuring financial institutions are stable and resilient. The FCA focuses more on conduct regulation, ensuring that firms act with integrity and in the best interests of consumers.
Q3: Which institutions fall under the jurisdiction of the PRA? A3: The PRA regulates banks, building societies, credit unions, insurers, and major investment firms.
Q4: When was the PRA established? A4: The PRA was established in April 2013.
Q5: Is the PRA part of any larger organization? A5: Yes, the PRA is part of the Bank of England.
Related Terms
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Financial Conduct Authority (FCA): Another regulatory body established alongside the PRA, focusing on conduct regulation.
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Financial Services Authority (FSA): The predecessor regulatory body that was split into the PRA and FCA in 2013.
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Systemic Risk: The risk of collapse of an entire financial system or entire market.
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Prudential Regulation: Regulation that focuses on ensuring the stability and solvency of financial institutions.
Online References
Suggested Books for Further Studies
- “Financial Stability and Prudential Regulation” by Charles Goodhart
- “The Economics of Banking” by Kent Matthews and John Thompson
- “Prudential Regulation of Banks” by Mathias Dewatripont and Jean-Charles Rochet
Accounting Basics: “Prudential Regulation Authority” Fundamentals Quiz
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