The PRA has outlined its focus areas for international and UK banks. The themes for 2022 overlap in resilience, climate risk, inclusion and diversity, and data, but also raise some differences. Paul Young discusses the key points and what they mean for firms.
The PRA sent out two Dear CEO letters on 12 January 2022, highlighting the priorities for this year. One for international banks active in the UK and one regarding UK deposit takers.
The regulator reaffirmed that the macroeconomic environment remains uncertain, requiring firms to assess the implications for the sustainability of their business models.
As the economy recovers and pandemic support schemes are withdrawn, banks are warned to monitor credit risk and traded risk within their portfolios.
The PRA will continue to assess robust operational risk and control frameworks to manage the threat of operational disruptions. This includes building security controls and managing cyber threats.
The regulator re-iterated that by 31 March 2022 banks must have identified and mapped their important business services, set impact tolerances for these and initiated a programme of scenario testing.
Banks need to diligently manage outsourcing and third-party risk.
Echoing the letter to international banks, the PRA will keep operational risk and resilience as a strategic priority for UK banks.
Climate change risks
The PRA noted that progress on climate risk has not been consistent. It stated that most firms see climate change as an opportunity, but they should also recognise it as a business risk.
The regulator expects firms to take a proactive approach to climate-related financial risks. The PRA will scrutinise how firms quantify climate-related risks and embed those risks, adding, "we will keep a range of supervisory tools under review for use where we deem progress to be insufficient.”
Regulatory climate risk expectations for UK banks logically compare with those already mentioned for international banks.
Inclusion and diversity
Encouraging diversity in the financial services sector will continue to be an area of focus and the PRA expects firms to make improvements based on the themes set out in its Discussion Paper 2/21.
The PRA repeated its position on inclusion and diversity to UK banks.
Risk-free rate transition
The PRA expects banks to make best efforts to actively transition legacy LIBOR-referencing contracts wherever possible.
Data, return integrity, and skilled persons review
The PRA will also focus on leveraging data to support the delivery of regulatory returns. It will continue its work on expanding its programme of using skilled persons reviews to verify the accuracy of regulatory returns.
The PRA outlined the same economic recovery priorities for UK banks as for international banks, but noted that the BoE will conduct a stress test in 2022 using its Annual Cyclical Scenario (ACS) framework.
Credit risk and model risk
The regulator noted that firms should keep a close eye on credit risk within their portfolios and the impact on provisioning.
The strength of credit risk management practices will be a focus area.
It will also increasingly look at model risk management.
The PRA expressed disappointment over significant deficiencies in several firms’ processes for delivering accurate and reliable regulatory returns, after commissioning reports from skilled persons.
It will continue to expand its reliance on skilled person reviews.
LIBOR transition and resolvability
The PRA said it will continue to support the LIBOR transition and will work with the BoE to improve resolution through the Resolvability Assessment Framework (RAF).
What to do next
These documents provide an overview of the regulator’s direction in 2022 and serve as reminders to banks to ensure they can address regulatory changes.
To find out how we can help you efficiently and effectively address your regulatory concerns, contact Paul Young.