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.
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
The Network for Greening the Financial System (NGFS) launched its first user feedback survey on climate scenarios, with the feedback period ending on February 27, 2023.
The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.