The Financial Conduct Authority (FCA) decided to register European DataWarehouse Ltd and SecRep Limited as securitization repositories under the UK Securitization Regulation, with effect from January 17, 2022. Meanwhile, the Bank of England (BoE) published a summary of the meeting of the Data Standards Committee, with the participants agreeing that BoE Secretariat will provide a list of firms interviewed for commercial real estate, delivery group proposing that BoE and FCA standardize the counterparty category definitions, and members agreeing to commission a data standards review. In addition, the Prudential Regulatory Authority (PRA) published its 2022 priorities for UK deposit-takers and international banks active in UK. The priorities address factors such as financial resilience, credit and model risks, operational risk and resilience, regulatory reporting, and financial risks arising from climate change.
PRA plans to continue to engage with deposit-takers to assess the robustness of their credit risk management practices, with four ongoing thematic reviews on wholesale problem debt management, unsecured personal loans, buy-to-let, and IFRS 9 retail models. PRA also plans to continue to focus on the implementation of internal ratings-based (IRB) hybrid mortgage models, IRB roadmap for non-mortgage portfolios, and IRB aspirant firm model applications. Another aim is to increase focus on the effectiveness of model risk management practices and the remediation actions firms are taking. In addition to this, PRA has set out the following common priorities for supervision of deposit-takers and international banks:
- Financial resilience. PRA will continue to engage with firms to assess the challenges that the structural changes bring to sustainability of business models. BoE will conduct a stress test in 2022, using the Annual Cyclical Scenario framework, to explore the financial resilience of major UK banks and building societies. Assessing the risk culture and the incentive structures in place at firms and aligning remuneration with risk management practices will constitute key priorities of the supervisory work with firms engaged in equity finance and the broader prime brokerage business. In addition, the theme of global regulatory cooperation will continue into 2022.
- Operational risk and resilience. PRA intends to continue to assess firms’ progress in developing dynamic, effective operational risk and control frameworks to manage the threat of operational disruptions. It expects firms to develop their security controls and capabilities to manage the increasing risk of cyber threats. It also encourages all firms, regardless of size, to test their resilience against such threats. By March 31, 2022, firms are expected to have identified and mapped their important business services, to have set impact tolerances for these business services, and to have initiated a program of scenario testing. PRA will continue to review firms’ programs and their implementation.
- Financial risks arising from climate change. PRA expects firms to take a forward-looking, strategic, and ambitious approach to managing climate-related financial risks. This approach should be proportionate to the scale of the risks and the complexity of a firm’s operations. From 2022, PRA will incorporate supervision of climate-related financial risks into its core supervisory approach. The assessment of a firm’s management of climate-related financial risks will be included in all relevant elements of the supervisory cycle. PRA also expects firms to refine and innovate to better integrate climate-related financial risk management across their organization. PRA will focus on how firms quantify climate-related risks and incorporate those risks into business strategies, decision-making, and risk-taking. Furthermore, PRA will keep a range of supervisory tools under review for use where it deems progress to be insufficient.
- Regulatory reporting and data quality. PRA expects the regulatory reporting process to receive no less care, diligence, and rigor than financial reporting. PRA is expanding its program of using skilled person’s reviews to verify the accuracy of regulatory returns, which will continue in 2022. Longer term, joint industry-BoE work on transforming data collection, creates the opportunity for better quality reporting at lower cost and PRA encourages firms to engage with this initiative.
- Other areas of supervisory focus. Together with FCA, PRA will closely monitor actions to remove any remaining dependencies on LIBOR, including synthetic LIBOR. PRA also expects firms to use the most robust alternative reference rates to LIBOR. BoE and PRA will continue to prioritize resolution going forward. The Resolvability Assessment Framework applies to firms where the preferred resolution strategy is bail-in or partial-transfer. These firms should continue to work to ensure that they achieve, and can continue to maintain, the resolvability outcomes and ensure that they are transparent in their disclosures about the preparations for resolution.
- FCA Press Release on Repositories
- BoE Summary of Data Standards Meeting
- PRA on Priorities for Deposit-Takers
- PRA on Priorities for Internationally Active Banks
Keywords: Europe, UK, Banking, Securities, Securitization Repositories, Securitization Framework, Data Transformation, Credit Risk, Climate Change Risk, ESG, Operational Risk, LIBOR, Interest Rate Benchmarks, Work Priorities, Reporting, Modeling Risk, FCA, BoE, PRA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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