Featured Product

    PRA Presents Findings from Review of Fast Growing Deposit Takers

    June 12, 2019

    PRA published a letter to CEOs, from Melanie Beaman (Director, UK Deposit-takers Supervision) communicating the overall findings from the review of 20 non-systemic deposit taking firms with different business models and activities. The letter summarizes findings from the review, which covers three elements: Internal Capital Adequacy Assessment Process (ICAAP) stress testing, based on the BoE published 2018 stress scenario; asset quality reviews; and funding and lending analysis. The review aimed to test the financial resilience of fast-growing firms and enhance the PRA knowledge of the funding and lending markets in which they operate. The letter highlights the aspects of risk management and control that the regulator considers all firms should be adopting.

    In the review of stress test outcomes, the overall concern was that fast-growing firms could be underestimating the potential losses that could arise on their loan portfolios under the given scenario. In reviewing their own stress test results, few fast-growing firms explicitly took account of the average impairment rates that are published as part of the results of the BoE annual stress test for the major UK banks. Although these published numbers are average rates on broad portfolios, so may not be directly applicable, they are a helpful reference point and cross-check for an assessment of the risk profile of a particular loan book and how it might behave under stress. In general, the fast-growing firms exhibit concentrations in higher-risk market segments, which may be more vulnerable to stress. The letter states that all firms should ensure that risk concentration is taken into account in their provisioning and stress models. All firms should ensure that the management actions they propose in their ICAAP stress test are consistent with the stress scenario used.

    The asset quality review found that risk appetite statements of these fast-growing firms tended to be high level and did not fully capture risks or include sufficiently granular metrics to enable the level of risk to be adequately monitored. Certain areas of weakness were also observed in some fast-growing firms’ information provided to management and boards (MI). Firms can seek to address this through broadening the range of risk metrics and enhancing both data quality and risk MI, as and when individual portfolios become more material in size. In some cases, forbearance practices were not in line with industry standards; poor practice could potentially mask the level of arrears, delay appropriate recovery actions and thus impact overall book performance in a downturn. PRA observes that firms benefit from MI, which provides sufficiently detailed information on key loan book risk characteristics or combinations of risk characteristics, which could identify potentially vulnerable segments.

    The review also shows that a number of fast-growing firms exhibited a lack of diversity in funding sources, being almost entirely reliant on funding from competitively priced, short-term fixed rate retail deposits. Fast-growing firms were not found to be disproportionately reliant on wholesale funding. The analysis showed an element of over optimism in funding spreads assumed in many firms’ plans. More widely, most firms’ pursuit of aggressive balance sheet growth targets was driven from the asset side of the balance sheet, requiring firms to maximize funding from all available funding sources, including non-core funding such as secured funding, wholesale funding, SME, and corporate deposits, all of which could increase execution and refinance risks. However, better firms took into account various market pressures as well as their own ability to differentiate pricing on both sides of the balance sheet in both their baseline and stress testing projections.

     

    Related Link: Letter

     

    Keywords: Europe, UK, Banking, Fast Growing Firms, Governance, Risk Appetite, ICAAP, Stress Testing, Asset Quality Review, PRA

    Featured Experts
    Related Articles

    PRA Publishes Q&A on Property Valuation Requirements Under CRR

    PRA published a set of questions and answers (Q&A) covering common queries regarding residential and commercial property valuations, for the purpose of the Capital Requirements Regulation (CRR), during the period of disruption caused by COVID-19 pandemic.

    May 29, 2020 WebPage Regulatory News
    News

    IOSCO Consults on Outsourcing Principles for Operational Resilience

    IOSCO proposed updates to its principles for regulated entities that outsource tasks to service providers.

    May 28, 2020 WebPage Regulatory News
    News

    MAS Consortium to Develop AI Fairness Metrics for Credit Scoring

    MAS announced that the first phase of the Veritas initiative will commence with the development of fairness metrics in credit risk scoring and customer marketing.

    May 28, 2020 WebPage Regulatory News

    BoE Updates Definitions for BTL Data Collection

    BoE published the Statistical Notice 2020/4 to update the buy-to-let (BTL) Phase 2 and Phase 3 definitions for the Interest Rate Type data item.

    May 28, 2020 WebPage Regulatory News
    News

    FSI Examines Financial Stability Implications of Payment Deferrals

    FSI published a brief note that examines challenges facing the banking sector as a result of the payment deferral programs put in place to support borrowers affected by the COVID-19 pandemic.

    May 28, 2020 WebPage Regulatory News
    News

    PRA Finalizes Policy on Prudent Person Principle Under Solvency II

    PRA published the policy statement PS14/20, which contains the supervisory statement SS1/20 and the feedback to responses to the consultation paper CP22/19 on expectations for investment by firms in accordance with the Prudent Person Principle, or PPP, as set out in the Investments Part of the PRA Rulebook.

    May 27, 2020 WebPage Regulatory News
    News

    EBA on Extending Large Exposure Limits for French Systemic Banks

    EBA published an opinion following the notification by the French macro-prudential authority, the Haut Conseil de Stabilité Financière (HCSF), of its intention to extend a measure introduced in 2018 on the use of Article 458(9) of the Capital Requirements Regulation (CRR).

    May 27, 2020 WebPage Regulatory News
    News

    ECB Highlights NPL Resolution as Key Policy Issue in Post-COVID Europe

    As part of a Research Bulletin on the recent policy-relevant work, ECB published an article that examines the lessons learned from past crises for nonperforming loan resolution in the post COVID-19 period.

    May 27, 2020 WebPage Regulatory News
    News

    RBNZ Publishes Financial Stability Report for May 2020

    RBNZ published the financial stability report for May 2020. This review of the financial system in the country highlights that the economic disruption associated with COVID-19 will present challenges to the financial system.

    May 27, 2020 WebPage Regulatory News
    News

    ECB Updates Guidance on Reporting of Securities Holdings Statistics

    ECB updated the guidance notes for reporting related to the statistics on holdings of securities by reporting banking groups (SHSG).

    May 26, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5231