andrew bailey : progress on prudential regulation and three areas to complete speech by mr andrew bailey, deputy governor of prudential regulation and chief executive officer of the prudential regulation authority at the bank of england, at the city banquet, mansion house, london, 22 october 2015. * * * my lord mayor, ladies and gentlemen – it is a great pleasure to be here again at the regulators dinner, and it is very good of you to entice so many people here tonight with the prospect of an evening with regulators. i won ’ t speculate on how this ranks on the scale of evenings spent in our cosmopolitan capital city. it is also a great pleasure to be speaking here tonight with tracey. this evening i want to describe the progress we have made on prudential regulation and then examine a number of topical issues for the pra and the financial services industry : the senior managers and certification regime ; structural reform and ring fencing ; and what the pra is doing to pursue its secondary objective on competition. a common theme here is getting the incentives right to support good outcomes in relation to both prudential and conduct objectives. progress it is over eight years now since the financial crisis began in this country. and to continue tracey ’ s theme for a moment, it is possibly salutary to recall that amidst the many bad events of autumn 2007, england reached the final of the rugby world cup. i didn ’ t expect to say “ those were the days ” about 2007. it was natural that the first response to the financial crisis in terms of reforms was focused on the bedrock prudential issues of capital and liquidity in banks. this has been supplemented by the drive both internationally and domestically to solve the too big to fail problem through a combination of resolution measures at the centre of which is agreement on total loss absorbing capacity for those banks which require such a bulwark to ensure orderly resolution in the event of failure. this is crucial to break the dependence of failing banks on injections of public money and likewise to break the impact of solvency problems in banks on the public finances. this is an international as well as domestic agenda of reforms aimed at fixing the fault lines that caused the financial crisis, building a more resilient and open global financial system, and deepening and building trust across jurisdictions. i have said before, but i think it justifies repeating, that we are unwavering supporters of an open global financial system which finances the investment and trade necessary

problems however arise if there is too much liquidity transformation and / or too much leverage. in this situation non - banks can become major source of instability. the leveraged loans and high yield bond markets are particularly vulnerable in this respect. high yield debt levels are well above pre - crisis levels in the us, and roughly at pre - crisis levels in europe. 12 the good news is that the direct exposure of european banks seems relatively limited. the bad news is that non - bank financial intermediaries provide a high and increasing share of financing in the high - yield debt market13. should conditions deteriorate, such non - bank financial intermediaries are directly exposed to considerable potential losses. increases in credit risk premia would add to that. and perhaps even more important, there could be system - wide spillovers beyond the high - yield debt markets. in the past decade we focused most of our attention on strengthening bank regulation. this was much needed, and on this front much has also been achieved. now we observe emerging risks within non12 fsb ( 2017 ), “ global shadow banking monitoring report 2016 ”, annex 7 p. 87. calculations based on bloomberg data. bank entities. regulation of non - bank entities may help to ensure that liquidity and credit risks in all parts of the financial system are well - managed. but if we conclude that from a financial stability perspective excessive debt and leverage of nonfinancial counterparts are actually the main drivers of risk, we could also look for instruments that aim to address these directly, such as borrower - based regulation. the dutch consumer mortgage market is a case in point here, where we have set limits to both the loan - to - value and loan - to - income ratios that apply to all lenders, banks and non - banks alike. such an approach could be explored more broadly. 5. conclusion ladies and gentlemen, i want to conclude. after the global financial crisis banking regulation has been significantly strengthened. efforts should now focus on consolidation, implementation, and evaluation of the reform agenda. the banking sector is in safer waters now. but european banks need to do more to make their business models sustainable and regain market confidence. at the same time we have to be alert to the buildup of leverage outside the banking sector. the financial industry is continuously evolving, and financial regulation will have to follow suit.