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Low interest rates creating ‘major challenge’ for banks – PRA

  • 27/10/2016
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Low interest rates creating ‘major challenge’ for banks – PRA
Banks are struggling to adapt to a lower-interest rate environment and regulatory constraints imposed by the Prudential Regulation Authority (PRA), its CEO Sam Woods has said.

Speaking at the City Banquet at Mansion House in London, Woods (pictured) admitted that tougher capital requirements imposed by the regulator combined with persistently low interest rates were making it more difficult for banks to lend.

Woods also said that the long-term impact of the 2008/09 financial crisis had cast “a very long shadow” on banks’ ability to generate profit and build capital adequacy.

He added: “For insurers, the low rate environment and persistent soft conditions in many segments of general insurance are creating real pressures. And judging from their persistent low profitability and price-to-book ratios, developing sustainable business models remains a major challenge for many banks.”

“One important element of this is misconduct, where the peak of the crisis for banks has arisen more slowly than the prudential crunch in 2008. It casts a very long shadow – most importantly, on the lives and livelihoods affected by unacceptable behaviour, but as a secondary effect on banks’ ability to generate sustainable returns and build capital internally.”

Woods said that in 2015, results published by UK banks showed that they were collectively forced to set aside £15bn in provisions relating to past misconduct, slashing pre-tax profits by around half.

Only today, interim results published by Barclays showed the bank had to reserve £600m in the third quarter of 2016 in relation to payment protection insurance (PPI) misselling.

Woods added: “…even leaving aside misconduct, many banks have simply not yet adapted to the new prudential constraints or the lower-rate environment. This is now a first-order issue for us as the PRA and FPC.”

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