PRA update – UK operational readiness needed for zero or negative interest rates
- On 4 February 2021, the Prudential Regulation Authority (PRA) published an open letter from Sam Woods, its Deputy Governor for Prudential Regulation and CEO
- Following the PRA’s information request dated 12 October 2020 to understand firms’ operational readiness to implement a zero or negative Bank Rate, the PRA is providing feedback to firms
- This letter also sets out the timeframe for PRA authorised firms to develop tactical solutions to implement a negative Bank Rate
- This is NOT implying that the Monetary Policy Committee (MPC) will employ a zero or negative policy rate
- The responses to the PRA’s October letter showed that firms are already able to deal with near-zero rates (down to at least two decimal places) and that, in the main, a zero Bank Rate would pose less of an operational challenge than a negative Bank Rate as well as taking less time to implement.
- While a small number of firms do not need to do any development work to implement a negative Bank Rate, most firms would need to make some changes to systems and processes to implement either a strategic or tactical solution.
- Based on firms’ responses to this exercise, the PRA understands that most firms would be able to implement tactical solutions to accommodate a negative Bank Rate within six months, without material risks to safety and soundness.
- Taking this into account, and consistent with the PRA’s primary statutory objective to promote the safety and soundness of individual firms, along with its insurance policyholder protection objective and secondary competition objective, the PRA considers that an implementation period of shorter than six months would attract increased operational risks and could adversely impact some firms’ safety and soundness and the PRA’s wider statutory objectives.
- Having considered the MPC’s request, as set out in the February MPC minutes, the PRA will now engage with PRA-authorised firms on their development of tactical solutions, with the aim of having firms put themselves in a position to be able to implement a negative Bank Rate at any point after six months.
Timeline with relevant dates to be logged on regulatory calendar
- Firms need to have completed operational readiness by 31 July 2021
The PRA urges all firms to get their internal processes ready at once for the possibility of zero or negative interest rates. The PRA expects to share further guidance.
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