Featured Product

    FED, PRA, and FCA Set Out Expectations for Risk Management at Banks

    December 10, 2021

    The Prudential Regulation Authority (PRA) published a Direction for modification by consent on the treatment of assets representing claims on the European Economic Area central governments. PRA is offering a modification by consent with respect to certain rules in the Liquidity Coverage Ratio (LCR) Part of the PRA Rulebook. The Direction allows any Capital Requirements Regulation (CRR) firm or CRR consolidation entity to continue treating certain such government assets as Level 1 high-quality liquid assets (HQLA) for the purpose of the LCR and net stable funding ratio (NSFR). Modifications will take effect on or after January 01, 2022 and remain in place until the modification has been revoked, varied, or superseded or until the relevant rules have been revoked or no longer apply to the firm. In addition, PRA and the Financial Conduct Authority (FCA) as well as the Board of Governors of the Federal Reserve System (FED) issued letters to banks on the supervisory expectations, following a review of the default and failure of Archegos Capital Management.

    The FED letter sets out the supervisory expectations for counterparty credit risk management and margin practices at large banks. The letter also sets out existing practices that do not meet supervisory expectations and identifies ways to mitigate these practices. The letter states that the failure of Archegos Capital Management resulted in over USD 10 billion in losses across several large banks. The letter highlights that regardless of the type of client, banks are expected to undertake proper due diligence with a client and take fully into account the risks that a relationship with a client may pose to the bank. In its letter, FED highlights that firms should:

    • Receive adequate information with appropriate frequency to understand the risks of the investment fund, including position and counterparty concentrations, and either reconsider the relationship or set sufficiently conservative terms for the relationship if the client does not meet appropriate levels of transparency
    • Ensure that the risk-management and governance approach applied to the investment fund is capable of identifying the fund's risk initially and monitoring it throughout the relationship
    • Ensure applicable areas of the firm—including the business line and the oversight function—are aware of the risk their investment fund clients pose to the firm and have tools to manage that risk
    • Ensure that margin practices remain appropriate to the fund's risk profile as it evolves, avoiding inflexible and risk-insensitive margin terms or extended close-out periods with their investment fund clients

    The letter from PRA and FCA also sets out key supervisory expectations, following a review of the global equity finance businesses, post the default of Archegos Capital Management. The letter and its Annex set out the key observations and expectations in the areas of business strategy and organization, onboarding and reputational risk, financial risk management controls and governance, and liquidation and close-out. The key observations cover weaknesses in the holistic management of risk across business units, narrow focus of onboarding arrangements and inadequate re-assessment of client relationships thereafter, ineffective and inconsistent margining approaches, and an absence of comprehensive limit frameworks. This episode of the failure of Archegos Capital Management revealed important lessons to learn for risk management in equity financing businesses of firms; these learnings will help to ensure that the risks associated with non-bank leverage do not lead to financial stability issues in the future. PRA and FCA expect firms to conduct a systematic review of their equity finance business, with their risk management practices and controls benchmarked against the findings set out in the letter. Firms are required to report their findings to PRA and FCA, along with the detailed plans for remediation, where relevant, by the end of the first quarter of 2022.

     

    Related Links

    Keywords: Americas, Europe, US, UK, Banking, Securities, Counterparty Credit Risk, Archegos Capital Management, Governance, Liquidity Risk, LCR, NSFR, PRA Rulebook, HQLA, CRR, Onboarding Risk, PRA, FCA, FED

    Related Articles
    News

    EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models

    The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.

    June 21, 2022 WebPage Regulatory News
    News

    EP Reaches Agreement on Corporate Sustainability Reporting Directive

    The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).

    June 21, 2022 WebPage Regulatory News
    News

    PRA Consults on Model Risk Management Principles for Banks

    The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.

    June 21, 2022 WebPage Regulatory News
    News

    EC Regulation Amends Standards for Calculating Credit Risk Adjustments

    The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.

    June 21, 2022 WebPage Regulatory News
    News

    BIS Hub Updates Work Program for 2022, Announces New Projects

    The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.

    June 17, 2022 WebPage Regulatory News
    News

    EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.

    June 17, 2022 WebPage Regulatory News
    News

    US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule

    Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)

    June 16, 2022 WebPage Regulatory News
    News

    EIOPA Consults on Review of Securitization Framework in Solvency II

    The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.

    June 16, 2022 WebPage Regulatory News
    News

    UK Authorities Issue Regulatory and Reporting Updates for Banks

    The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.

    June 15, 2022 WebPage Regulatory News
    News

    BCBS Issues Climate Risk Principles while HKMA Expresses Its Support

    The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.

    June 15, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8286