By Chris Dorrell
The Prudential Regulation Authority (PRA) today criticised City banks’ approach to risk management despite “regular messaging” on the issue.
In a letter sent to bank executives in the City, the Bank of England’s regulatory arm set out its priorities for the New Year.
Top of the list for regulators was financial resilience, in particular “deficiencies in banks’ risk management and governance frameworks.”
These issues, the letter said, were brought to light by the 2021 collapse of Archegos Capital Management.
The investment fund collapsed after defaulting on margin calls – when a broker demands more money to be added to an account to cover potential losses – from several investment banks.
Last year only “reinforced the importance of a robust risk culture and sound risk management practices at firms” the PRA said, also citing Russia’s invasion of Ukraine, volatility in the nickel market and the long-dated Gilt market.
“Last year we specifically asked firms to consider concentrated and leveraged exposures and to improve counterparty risk management,” the regulators said.
However, “despite regular messaging from the PRA on the subject, these events demonstrated that firms continue to unintentionally accrue large and concentrated exposures to single counterparties, without fully understanding the risks that could arise,” the letter said.
Another area of interest included in the PRA’s letter was “financial risks arising from climate change”.
“Last year’s volatility in commodities markets provides an illustrative example of the types of risk that could crystallise for some firms with commodities exposures, in the context of the energy transition,” the PRA said.
It added that banks should take action proportionate to the nature of the risks they face.
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