MPs have demanded fresh powers for the incoming Prudential Regulation Authority to tackle proprietary trading by banks, but have stopped short of calling for an outright ban saying the activity is ill-defined and therefore prohibition would “not be appropriate”.
In a report published today (15 March), the Parliamentary Commission on Banking Standards highlighted that while UK banks said that they do not currently engage in proprietary trading, the loose definition of such activities makes it likely that risks could arise in the future.
The Commission said that UK UK banks agree that proprietary trading carries large risks, both prudential and to banking standards, however banks flagged up that the definition of proprietary trading is unclear, with Barclays describing it as “notoriously challenging”.
Most commentators define it as “principal trading” or a bank taking a position for the purpose of profiting on the position itself, but activity that could be regarded as “principal trading” arises from a range of activities in banks.
The committee said the PRA should pay “close attention” to trading units which have characteristics such as large open or arbitrage positions and volatile revenue flows.
It demanded that the PRA publish reports on banks’ activities and market exposures on an annual basis and said legislation governing the PRA’s powers should be enhanced to allow it to intervene in cases of “pure” proprietary trading.
Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards, said: “The immediate risk to UK banking standards from proprietary trading may be limited. However, effective regulatory oversight will be particularly important for the future. At a time when banks are under less intense scrutiny, proprietary trading could re-emerge as a greater risk.
“Were this approach to prove ineffective, further measures, including prohibition, could be desirable.
“We expect the PRA to report on the implementation of our recommendations, drawing also on the experiences of other countries which are currently implementing restrictions on proprietary trading.
“This should be followed by an independent review of the case for further action.”