On 15 December 2020, the PRA published a Dear CEO letter to PRA-regulated UK deposit takers setting out its supervisory priorities for 2021.
Key points in the letter include:
- The economic consequences of COVID-19 are expected to continue and will cause additional impacts on banks and building societies, particularly once the cushion of temporary government support schemes and supervisory measures starts to recede. The PRA will remain focused on the challenges some firms have in establishing or maintaining sustainable business models in the continued low rate environment, with potential pressure on net interest margins, and wider global economic headwinds, coupled with adjustment to the post-Brexit world.
- The PRA anticipates an increase in customers in financial difficulty, arrears and default over 2021. The PRA will maintain engagement across the sector, as appropriate, to assess whether firms have robust credit risk management practices, and whether they are considering an appropriate range of scenarios in determining provisioning levels, including appropriate use of staging within IFRS9 or other applicable accounting regimes.
- The PRA’s assessment of firms’ credit risk will continue to be a risk-based blend of thematic and firm-specific reviews. Three thematic reviews are currently underway (buy-to-let, SME, and retail collections). The PRA anticipates further thematic work on wholesale portfolios in potentially COVID-19 vulnerable sectors, plus some international portfolios subject to challenging economic and credit risk conditions.
- Enhancing the operational resilience of the financial sector remains a strategic priority for the PRA, and COVID-19 has reinforced its importance. The PRA will continue to challenge how firms are ensuring that risk and control frameworks are operating effectively under the current working environment.
- In terms of the transition from LIBOR to alternative risk-free rates, the PRA will be monitoring firms’ progress against the targets of the Working Group on Sterling Risk Free Reference Rates and targets for non-GBP exposures where relevant. The PRA will also be closely monitoring how firms are managing the risks associated with transition, through regular review meetings with a range of firms and by reviewing the data it collects on firms’ exposures. The PRA will consider a range of supervisory tools for use where it sees insufficient progress, or incidents of poor risk management or governance of transition.
- Climate change represents a material financial risk to firms and to the financial system and remains a key PRA priority. Firms should continue to take a proportionate approach that reflects their exposure to climate-related financial risk and the complexity of their operations.
- The PRA continues to see strong governance at firms as being key to underpinning progress in meeting its supervisory expectations. It also views diversity as important for improving decision-making and providing effective challenge.
On the same date the PRA published a Dear CEO letter to PRA-regulated international banks covering similar issues.