CRO letter from PRA: Thematic review of private equity related financing – what do banks need to do before the August 2024 deadline?

In recent months regulatory focus has been on the scale, breadth, complexity and interconnectedness of banks’ private equity related exposures. With the landscape of the PE sector continuing to evolve, and with bank safety and soundness a key consideration, the PRA considers it imperative for banks to ensure that their risk management approach is sufficiently comprehensive and robust to control changes to the size and composition of their overall exposure to the PE sector. With this in mind, the PRA has been conducting a thematic review of these businesses, to assess the adequacy of banks’ risk management frameworks. 

Well, findings have now been published, and regulated banks have been requested to conduct a benchmarking exercise in short order of their risk management processes in relation to the sector.

The findings of the thematic review can be found in a letter sent to bank CROs on 23^rd April 2024, in which the PRA identifies a number of thematic gaps in banks’ overarching risk management frameworks that control their aggregate PE sector related exposures.  To manage these risks effectively, the PRA directs banks to:

• better employ group-wide risk data aggregation tools, stress testing capabilities and consolidated management information reporting processes;
• ensure boards are fully involved in overseeing the firm-wide strategy and combined business initiatives relating to the PE sector and are properly informed of aggregate exposure trends in associated credit and counterparty risks – the scale and composition of such exposures should be considered in the context of the overall risk profile of the bank;
• ensure boards take measures that enable them to take a consolidated view of their exposures to other important business segments and any associated counterparty and credit risk concentrations.

The overall risk the PRA is keen to address is that when banks fail to properly measure and assess their aggregate exposures, and in the absence of a defined risk appetite framework and board engagement, it’s very easy to develop an outsized and concentrated exposure that leaves one open to the risk of a large loss.  In a speech made alongside the issuance of the results of the thematic review, Rebecca Jackson (PRA) reminds banks that “the risk of outsized, illiquid, and unintentionally concentrated exposures is something that we have been pointing out for some time now, and for which we have very little patience”.

Next steps

The annex to the letter sets out the PRA’s main findings in greater detail, and banks are directed to assess these against their current practices – and in particular should highlight any gaps between the PRA’s expectations set out in Section C of the Annex the bank’s internal risk and governance frameworks. 

CROs are expected to provide to their supervision team by 30 August 2024 (i) a confirmation that the output of such benchmarking activity has been shared with the bank’s Board Risk Committee; and (ii) a copy of this analysis together with detailed plans to remediate any gaps.

Further resources

You can find the 23/04 letter to CRO’s here

The CRO letter was supplemented by a speech given by Rebecca Jackson on 23/04, Executive Director for the PRA’s Authorisations, RegTech, and International Supervision Directorate 

An earlier speech given by Nathanaël Benjamin on 22/04, Executive Director for Financial Stability Strategy and Risk and a member of the Financial Policy Committee (FPC), provides some macroeconomic context to the discussion