Today’s joint Bank of England and FSA paper The Bank of England, Prudential Regulation Authority – Our approach to banking supervision outlines how the PRA will approach the supervision of banks, building societies, credit unions and investment firms.

“The PRA’s purpose is fundamentally different from that of previous regulatory regimes and will lead to a significantly different model of supervision to that which was in use pre-2007,” said Sants. “In designing this new model we have incorporated both the lessons learned from the last financial crisis and those from firm failures of the past.”

He added the new regulatory model, set to come into place by the end of 2012, will be based on “forward looking judgements” underpinned by the PRA’s single objective of promoting the stability of the financial system.

“The PRA will be forward-looking, seeking to assess whether, on the balance of risks, there are vulnerabilities in firms’ business models, capital and liquidity positions, governance, risk management and controls that cast into doubt their future financial soundness,” said the paper.

Sants, who will head up the PRA, said its supervisory approach will build on the more intensive approach adopted by the FSA since the financial crisis.

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Today’s paper also said all firms under the PRA’s regulatory scope will be subject to a baseline level of supervisory oversight designed to reduce the probability of failure and ensure if firms do fail they do so in an orderly manner.

It will have a range of powers available under statute to help support the stability of the system.

“The PRA’s preference will be to use its statutory powers to secure ex-ante, remedial action (for example through restrictions on the business imposed via variations in a firm’s permission to undertake regulated activities).

“Successful application of the PRA’s approach should mean that enforcement actions will be relatively rare.”

In what it called an important change to the statutory basis of prudential supervision, the FSA said: “The PRA will not view the failure of an institution in an orderly manner as regulatory failure, but rather as a feature of a properly functioning market.”

The PRA will not routinely disclose its own judgements on a firm. However, it will work with the FCA, in its role as markets regulator, to require firms to make available as much information as possible to ensure investors and other parties can make their own judgements.

After the restructure, the PRA will be responsible for the prudential supervision of over 2,000 firms, of which around half will be deposit-takers. A companion paper covering its approach to supervising insurance companies will be published in June.

British Bankers’ Association chief executive Angela Knight said: “The banking industry in the UK is fully supportive of sensible and considered reform and has already made significant strides in overhauling and enhancing its own working practices.

“Today’s announcement, setting out the authorities’ approach to banking supervision in the future, is a welcome step forward offering a real opportunity to progress the lessons we have all learned to create a stronger regulatory framework for the future.”