PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks. One of the notable risks this letter focuses on is liquidity risk. There is a risk for deposit-takers, notably for small and medium-size firms, that deposits from a Deposit Aggregator may represent a significant portion of their balance sheet and present a concentrated liquidity risk. While the deposits from the Deposit Aggregator may come from a diversified client base, the flow of deposits sourced from a Deposit Aggregator may be correlated, as there is a single commercial relationship between the Deposit Aggregator and the deposit-taker. Firms should factor this into their management of liquidity risk and funding needs.
In the letter, PRA and FCA outline the following as the next steps for firms:
- Have discussions at the appropriate level within the firm and consider addressing any aspects that are directly relevant to the firm and its business model
- Consider the extent to which your deposit book relies on business sourced via Deposit Aggregators and whether this requires the firm to take any action
- Consider measures to achieve a faster customer repayment by the Financial Services Compensation Scheme, or FSCS, in the event of need
- Look at widening the information provided to the FSCS, FCA, or PRA to include both information about the Deposit Aggregators used by the firm and the level of deposits coming via them and whether the firm uses a "direct" or "trust" model which will support swift payout
- Consider the level of transparency regulated firms have regarding the beneficial owners of deposits sourced from Deposit Aggregators
Keywords: Europe, UK, Banking, Deposit Aggregators, Liquidity Risk, Risk Mitigation, FSCS, Concentration Risk, FCA, PRA
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