The intensity of our supervisory activity varies across firms. The level of supervision principally reflects our judgement of a firm's potential impact on the stability of the financial system, its proximity to failure (as described in the Proactive Intervention Framework), its resolvability, and our statutory obligations. Other factors that play a part include the type of business carried out by the firm, and the complexity of the firm's business and organisation.

Our risk assessment framework

33. We take a structured approach when forming our judgements. To do this, we use a risk element framework – see Figure 1. The framework assesses the risk posed by firms to the PRA's objectives, assessing gross risk and mitigating factors. The starting point is to assess the gross risk by measuring the potential impact a firm has on the stability of the UK financial system and the external context and business model risk which a firm is exposed to. This is then overlaid with mitigating factors which are the actions a firm takes to offset the gross risk. When taken together, this helps us to make an assessment of the net risk that any given firm poses to the PRA's objectives.

Figure 1: The PRA's Risk Element Framework

34. Our starting point for any firm's risk assessment is the potential impact assessment in which we assess the significance of a firm to the stability of the UK financial system. This 'potential impact' reflects a firm's potential to affect adversely the stability of the system by failing, coming under operational or financial stress, or because of the way in which it carries out its business.