Featured Product

    PRA Sets Out Supervisory Priorities for Banks and Insurers for 2021

    December 15, 2020

    PRA published "Dear CEO" letters outlining the 2021 priorities for deposit-takers, international banks, and insurance firms in the UK. The key focus areas for these supervisory priorities include financial resilience, credit risk, operational risk and resilience, LIBOR transition, and financial risks arising from climate change. The letters highlight that PRA will continue to use the Senior Managers Regime to support its objectives in 2021. Additionally, PRA has been running a pilot project to assess the standard of regulatory returns, which will continue in 2021, as mentioned in the letters for deposit-takers and international banks. The letter to insurance firms informs that, following the end of the Brexit transition period, PRA will assume a number of functions previously performed by EIOPA, including the publication of technical information used in the calculation of insurance liabilities.

    The key supervisory priorities for deposit-takers, international banks, and insurance firms for 2021 include the following:

    • Financial resilience—PRA will continue to monitor its regulatory regime to ensure it does not act in a procyclical way, including ensuring firms can draw down on capital and liquidity buffers where necessary. PRA has judged that there is scope for large UK banks to recommence shareholder distributions and that bank boards should make decisions about 2020 distributions. Large UK banks will operate within temporary guardrails set by PRA, as a stepping stone toward its standard approach to capital-setting and distributions through 2021. BoE will conduct a stress test in 2021 to explore the financial resilience of major UK banks and building societies. PRA intends to build on previous, sector-wide insurance stress test exercises to develop stress testing as a supervisory tool. PRA will run another comprehensive insurance stress test in 2022. In 2021, PRA will also develop its approach to recovery and resolution planning in the insurance sector.
    • Credit risk—PRA will maintain engagement, as appropriate, to assess whether firms have robust credit risk management practices and whether they are considering an appropriate range of scenarios in determining provisioning levels, including appropriate use of staging within IFRS 9 or other applicable accounting regimes. In the letter for deposit-takers, PRA notes that the assessment of firms’ credit risk will continue to be a risk-based blend of thematic and firm-specific reviews. Three thematic reviews are underway and PRA anticipates further thematic work on wholesale portfolios in potentially COVID-19 vulnerable sectors, plus some international portfolios subject to challenging economic and credit risk conditions. While payment deferrals remain of interest, the intensity of data collection is expected to ease over 2021. PRA will also look to re-assess the temporary COVID-19 data collections at an appropriate time. 
    • Operational risk and resilience—PRA will continue to challenge how firms are ensuring that risk and control frameworks are operating effectively under the current working environment. Following the policy consultations, PRA intends to set standards for operational resilience and outsourcing during 2021.
    • Transition from LIBOR to alternative Risk Free Rates—The continued reliance of global financial markets on LIBOR poses a risk to financial stability that can only be reduced through a transition to alternative risk-free rates. PRA will expect to see intensive efforts and early progress in 2021. PRA will be monitoring firms’ progress against the targets of the Working Group on Sterling Risk Free Reference Rates (RFRWG) and targets for non-GBP exposures where relevant. 
    • Competition and future regulatory frameworks—PRA will finalize the proposed approach for new and growing banks, set out in CP9/20, in the first half of 2021. BoE has been reviewing aspects of its minimum requirement for own funds and eligible liabilities (MREL) framework and intends to make an initial publication by the end of 2020. The Financial Policy Committee and Prudential Regulation Committee also intend to conduct a review of the UK leverage ratio framework, as noted in the letter for deposit-takers.
    • Financial risks arising from climate change—BoE will undertake a system-wide climate scenario exercise in 2021. The letters state that firms should continue to take a proportionate approach that reflects their exposure to climate-related financial risk and the complexity of their operations. By the end of 2021, an insurance firm should be able to demonstrate that it has implemented and embedded the expectations set out in supervisory statement on enhancing firms’ approaches to managing climate-related financial risks (SS3/19). Five UK life insurers and six UK general insurers are expected to participate in the Climate Biennial Exploratory Scenario (CBES), which will be launched in June 2021. This exercise aims to test the resilience of the current business models of the largest banks, insurers, and the financial system to the physical and transition risks from climate change. 

     

    Related Links

    Keywords: Europe, UK, Banking, Insurance, COVID-19, Supervisory Priorities, Credit Risk, Stress Testing, Recovery and Resolution, Operational Risk, LIBOR, Brexit Transition, Climate Change Risk, ESG, PRA, BoE

    Featured Experts
    Related Articles
    News

    APRA Issues Interim Update to Policy Priorities for 2021 and Beyond

    In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.

    September 24, 2021 WebPage Regulatory News
    News

    EC Adopts Solvency II and Resolution Rules Package for Insurers

    The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.

    September 22, 2021 WebPage Regulatory News
    News

    OCC Issues Booklets on Regulatory Reporting and Earnings

    The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.

    September 22, 2021 WebPage Regulatory News
    News

    ECB Sets Out Results of Economy-Wide Climate Stress Tests

    The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.

    September 22, 2021 WebPage Regulatory News
    News

    EBA Examines Implications of Increasing Use of Digital Platforms in EU

    The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.

    September 21, 2021 WebPage Regulatory News
    News

    HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact

    The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.

    September 21, 2021 WebPage Regulatory News
    News

    ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures

    The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.

    September 21, 2021 WebPage Regulatory News
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7494