PRA Business Plan 2022/23: what's on the horizon?

Topic

What’s happening?

When?

Financial Resilience

PRA will consult on implementation of Basel 3.1 (being the final package of banking prudential reforms developed in response to the 2008/09 financial crisis).

“during 2022”

Updates to the UK leverage ratio came into effect from 1 January 2022, reflecting revised international standards. Further changes to the UK leverage ratio are coming along, when the scope of the minimum leverage ratio requirement will extend to firms with non-UK assets above £10bn, as well as consolidation groups and ring-fenced bank (RFB) sub-groups exceeding the foreign assets threshold on a consolidated or RFB sub-consolidated basis, as applicable.

1 Jan 2023

Following two years of pandemic crisis-related stress-testing, the annual cyclical scenario (ACS) returns to test the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies, large falls in asset prices, and higher global interest rates, as well as a separate stress of misconduct costs.

It has been announced that the launch of the 2022 ACS will be delayed given the war in Ukraine.

A revised timeline for the ACS will be announced during Q2 2022

Operational Resilience

The joint regulators’ issued their operational resilience policy statement in March 2021, requiring firms to identify important business services, set impact tolerances for those services, and take action to continue to deliver them during severe but plausible disruptions. These requirements had an implementation deadline of 31 March 2022.

The next step is for the PRA to assess whether firms implemented the policy expectations by the time they came into effect, including an assessment of firms’ plans to ensure they will be able to deliver important business services within the set impact tolerances.

“in 2022”

Counterparty Risk Management

Referring to its SMCR powers, PRA emphasises the link between individual accountability and effective risk management, drawing particularly on deficiencies identified in counterparty risk management in 2021. This led to a December 2021 Dear CEO letter, sent to CEOs of global equity finance businesses, in which they were asked to improve their firms’ governance and control arrangements in this space.

The PRA is now assessing firms’ responses to that letter, and we can expect both bilateral engagement between the PRA and respondent firms, and also public statements from the PRA on the efficacy of steps taken and on any further measures required.

Not specified, but for 2022/23

Climate Change

Reiterating the statement made in its Climate Adaptation Report, the PRA notes its switch in approach to climate-related financial risk from assessing implementation to actively supervising against the threats.

The largest firms will be asked to prepare a short report on how they have embedded the management of climate-related financial risks into their existing risk management frameworks.

A sample of the remaining firms will also be asked to prepare a similar report proportionate to their size, the complexity of their business, and the extent of the climate-related financial risks that they face.

2022

The results of the 2022 Climate Biennial Exploratory Scenario (the Bank of England’s climate stress test) will be published. Learnings from this will guide further work between participants and PRA, and inform the direction of policy.

Publication due “by middle 2022”

Diversity and Inclusion

Reiterating its view that diversity and inclusion is an important part of corporate culture and the way a firm manages its risk, PRA will consult on proposals to support diversity and inclusion in the financial services sector, with new rules to follow.

Consultation in autumn 2022, with a policy statement in 2023

Risks of digitalisation

The PRA will monitor developments in key products (such as the impact of buy now pay later on unsecured lending) and the emergence of new banking business models with payments as a core component.

2022

Regulation of crypto assets

The PRA will continue to contribute to the Bank of England’s work on crypto assets, including oversight of the risks emerging from firms’ evolving levels of business and exposures in crypto assets.

The PRA has already issued a Dear CEO letter asking firms to report their crypto asset exposures as part of a survey of firms’ 2022 crypto assets current and planned exposures.

PRA will be engaging with international partners, including at the Basel Committee on Banking Supervision, to establish a common, international framework for the treatment of crypto asset exposures.

Work will also continue in developing a regulatory framework that is ready for technological innovations, such as stablecoins.

Dear CEO letter response due by 3 June

Ring fencing

The Final Report from the Independent Panel on Ring-fencing and Proprietary Trading was published in March. The Panel decided that the deposit threshold should remain at £25bn but has suggested exempting banks with deposits above this threshold where the value of excluded activities is below a de minimis level.

Other recommendations include:

• Aligning the ring-fencing and resolution regimes – with a view to allowing a bank to exit the ring-fencing regime should the bank be deemed resolvable
• Allowing RFBs to service smaller RFIs
• Removing the restriction preventing RFBs from establishing outside the EEA
• Reviewing excluded activities

HMT has established a task force, together with the Bank of England, to inform the Government’s response to the recommendations. The PRA will be working closely with HMT, to examine the recommendations, and respond to any changes that the government may make.

The Government response is expected later this year