The Prudential Regulatory Authority (PRA) has set out in a Dear CEO letter its supervisory priorities for international banks active in the UK for 2022.
According to the PRA, the priorities in the letter are intended to complement its ongoing supervision and feedback that international banks have received following their most recent periodic summary meeting.
The first key priority for 2022 is financial resilience. The PRA said that as the economic recovery is likely to be even across sectors, companies will need to closely monitor credit risk and traded risk within their portfolios. Furthermore, assessing the risk culture and the incentives structures in place at companies as well as the alignment of renumeration with risk management practices will be a big priority for the PRA supervisory work this year.
Operational risk and resilience will also be a priority. The PRA said it will continue to assess firms’ progress in developing dynamic, effective operational risk and control frameworks to manage the threat of operational disruptions. By 31 March 2022, businesses are required to have identified and mapped their important services, set impact tolerances for these services and initiated a program of scenario testing.
Impact tolerances provide a standard which senior management should use for prioritising investment and making recovery and response arrangements, the PRA noted. The organisation will also continue to review firms’ programs and their implementation.
Financial risks arising from climate change was highlighted as another top priority for the PRA. The authority stated that it expects companies to take a ‘forward looking, strategic and ambitious approach to managing climate-related financial risks’ and the PRA itself will incorporate supervision of climate-related financial risks into its core supervisory approach.
The organisation added that it will pay particular attention to how businesses quantify climate-related risks and incorporate them into business strategies, decision making and risk taking.
The fourth priority for the PRA is diversity and inclusion. It stated it has secured positive feedback from industry on proposals in an earlier discussion paper on this matter. The PRA noted it expects firms to consider the themes set out in said paper and challenge themselves to understand their gaps and where they can improve.
The PRA has also stated it expects companies to continue making its best efforts to actively transition LIBOR referencing controls wherever possible.
Meanwhile, the wider Bank of England previously set out its priorities going forward from 2021. In November, the BofE revealed it intends to crack down on banks and insurers who fail to hold enough capital to cover risks from climate change from next year.
In September, it also sent a warning letter to banks and building societies for not supplying correct information to help regulators identify risks to the financial system.
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