PRA supervision priorities 2023 (23/10)

Starting on 16 March 2020, I began writing daily blogs about the impact of the Covid crisis on financial regulation, and this has extended into commentary on regulation generally.

Last week, the PRA published a coordinated series of letters to UK deposit takers, international banks, and insurance firms respectively.

Some highlights...

OVERVIEW

The letters, as you'd expect, partly focus on PRA staple priorities of financial and operational resilience respectively, with UK deposit takers' having additional sections on credit and model risk. The letter to insurers has similarly bespoke sections on risk management, implementing financial reform (mostly code for Solvency 2), and reinsurance risk.

DATA

Both letters to banks have a short section on data which confirms the PRA's continuing frustration with "?deficiencies in the controls over data, governance, systems, and production controls related to regulatory reporting." More s166 reports on this are coming.

FINANCIAL RESILIENCE

For both UK and international banks, the section on financial resilience contains a substantive piece on risk management & governance, citing the market reaction to Russia's invasion of Ukraine and the Archegos scandal. Clearly the PRA isn't happy, including that "despite regular messaging from the PRA on the subject, these events demonstrated that firms continue to unintentionally accrue large and concentrated exposures to single counterparties, without fully understanding the risks that could arise." It's not entirely clear from the letters, however, what the next phase might hold beyond further messaging.

OPERATIONAL RESILIENCE

Especially for banks, this is probably the most detailed section, majoring on impact tolerances for IBS (important business services), legacy IT systems, outsourcing and CTPs (critical third parties), the renewal programme for RTGS (Real Time Gross Settlement), and (interestingly) crypto.

RISK MANAGEMENT (INSURERS)

Only insurers have this as a major heading, due to the "multiple external uncertainties" they face and the PRA's evident concerns about their capital models and whether they are of the same standard as banks'. September's LDI (liability-driven investment) crisis has also "highlighted gaps in insurers’ liquidity risk frameworks."

COST OF LIVING

For UK deposit takers, this is covered in the sections on credit and, implicitly, model risk. In the former, the list of "traditionally higher risk areas" is extensive enough - credit cards to SMEs and commercial real estate - to consume, in practice, a significant portion (perhaps the majority) of supervisors' discretionary time.

What I haven't yet noticed is a coherent statement of how this PRA agenda fits with the FCA's conduct focus on vulnerable customers. And while mortgages, an FCA preoccupation, they are a notable absentee from the PRA list. Possibly more work to do...

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