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
    News

    OSFI Issues Results of Pilot on Climate Risk Scenario Analysis

    The Office of the Superintendent of Financial Institutions (OSFI) published an update on the discussion paper that intended to engage federally regulated financial institutions and other interested stakeholders in a dialog with OSFI, to proactively enhance and align assurance expectations over key regulatory returns.

    January 20, 2022 WebPage Regulatory News
    News

    EC Issues Regulation on Adjustments to K-Factor Coefficients Under IFR

    The European Commission (EC) published a report summarizing responses to the targeted consultation on the supervisory convergence and the single rulebook in the European Union (EU).

    January 20, 2022 WebPage Regulatory News
    News

    ECB Issues Opinions on Green Bonds Standard and CRR Proposals

    The European Central Bank (ECB) published its opinion on a proposal for a regulation on European green bonds, following a request from the European Parliament.

    January 19, 2022 WebPage Regulatory News
    News

    ESRB Explores Policy Response to Risks Arising from Digitalization

    The Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) published a report that explores the expected impact of digitalization on provision of financial and banking services, and proposes policy measures to address the risks stemming from digitalization.

    January 18, 2022 WebPage Regulatory News
    News

    HKMA Consults on FIRO Code, Revises Policy on Foreign Exchange Risk

    The Hong Kong Monetary Authority (HKMA) is consulting on the draft Financial Institutions (Resolution) Ordinance (Cap. 628), or FIRO, Code of Practice chapter on liquidity and funding in resolution, until March 14, 2022.

    January 18, 2022 WebPage Regulatory News
    News

    FI Publishes Multiple Regulatory and Reporting Updates

    The Swedish Financial Supervisory Authority (FI) announced that the capital adequacy reporting as at December 31, 2021 must be done by February 11, 2022.

    January 17, 2022 WebPage Regulatory News
    News

    EU Authorities Address COVID-19 Reporting, MCD, and PSD2 Issues

    The European Banking Authority (EBA) announced that the guidelines on the reporting and disclosure of exposures subject to measures COVID-relief measures shall continue to apply until further notice.

    January 17, 2022 WebPage Regulatory News
    News

    BSP Tackles Aspects of Lending and Islamic, Open & Sustainable Finance

    The Central Bank of the Philippines (BSP) issued communications covering developments related to online lending platforms, open finance framework and roadmap, and on the expected regulations in the area sustainable finance.

    January 16, 2022 WebPage Regulatory News
    News

    US Agencies Issue Regulatory Updates, FDIC Launches Tech Sprint

    The Board of Governors of the Federal Reserve System (FED) published the final rule that amends Regulation I to reduce the quarterly reporting burden for member banks by automating the application process for adjusting their subscriptions to the Federal Reserve Bank capital stock, except in the context of mergers.

    January 13, 2022 WebPage Regulatory News
    News

    EBA Issues Guide on Bank Resolvability, Consults on Transferability

    The European Banking Authority (EBA) published its assessment of risks through the quarterly Risk Dashboard and the results of the Autumn edition of the Risk Assessment Questionnaire (RAQ).

    January 13, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 7903