The Prudential Regulation Authority (PRA), the regulatory arm of the Bank of England , has set out its priorities for 2023 in a letter to chief executives of institutions. The top priority set out by regulators was to improve risk management and governance frameworks to build financial resilience, addressing the blind spots exposed by the energy crisis and other major economic events which have impacted financial markets over the past few years.

It’s important that regulators work closely with banks and financial services organisations to improve risk management. All too often, manual systems remain in place for managing complex and time-consuming tasks related to anti-money laundering, risk, and compliance. The Bank of England, as resolution authority, and the PRA, continue to prioritise resolution as this is an important component of ensuring that the UK has a resilient, efficient, and competitive banking system.

The Bank of England has also updated their approach to categorising the ‘potential impact’ of firms, reducing the number of categories from five to four. The bank has also refined their risk assessment framework and their core assurance work. The priorities The impact of increasing interest rates, inflation, and high cost of living, geo-political uncertainty, and supply chain disruptions is expected to pose challenges to firms’ credit portfolios.

Firms need to be ready for a prolonged period of stress. Therefore, it is important that firms ensure their credit risk management practices are robust, portfolios are closely monitored, customer support, and collections arrangements are appropriately scaled, and expected credit loss provisions are recognised in a timely manner. The focus remains on operational risk and resilience, including through the assessment of firms against the PRA’s operational resilience rules.

By now, firms are expected to have identified and mapped their Important Business Services (IBS), set impact tolerances for these, and commenced a programme of scenario testing. In 2023, for Internal Ratings Based models (IRB), the Bank of England continues to focus on three key workstreams: the implementation of IRB Hybrid mortgage models; the IRB Roadmap for non-mortgage portfolios; and IRB aspirant firm model applications. The issues The PRA stated that these issues have continued, despite regular messaging around addressing the risks that arose following the collapse of a major hedge fund in 2021.

In 2022, the Bank of England highlighted the deficiencies in banks’ risk management and governance frameworks brought to light by the default of Archegos Capital Management. It specifically asked firms to consider concentrated and leveraged exposures and to improve counterparty risk management. However, despite regular messaging from the PRA on the subject, the firms continue to unintentionally accrue large and concentrated exposures to single counterparties, without fully understanding the risks that could arise.

In 2023, firms must ensure that those lessons from past crises are definitively learned in full, and thoroughly embedded across the first and second lines of defence. The bank now wants focus on firms’ ability to monitor and manage counterparty exposures, particularly to non-bank financial institutions. .