On 3 July 2023, the Prudential Regulation Authority (PRA) published a speech, delivered at UK Finance by Nathanael Benjamin, Executive Director of Authorisations, Regulatory Technology and International Supervision. In his speech, Mr Benjamin discusses the PRA’s 2023 supervisory priorities for international banks and says that banks must be proactive in anticipating the risks posed by the transition to a new macro-economic environment.

Key points discussed in Mr Benjamin’s speech include:

• The global economic outlook: Theimpact of consensus breakdown on credit markets could be significant. Mr Benjamin discusses the various risks that the PRA sees potentially occurring if the macroeconomic outlook worsens, noting that the PRA is particularly concerned about the potential impact that events in the US could have in the UK. He looks at certain business lines and risks that would be particularly vulnerable to the impact of a consensus breakdown and particularly relevant to the PRA’s supervisory priorities – private equity and private credit, repo matched books, and structured equity derivatives and autocallables.

• Commodities: Mr Benjamin discusses the ‘complex interplay’ between commodities and climate change, which he says warrants careful consideration even for firms that do not have a commodities franchise or direct commodities exposures. He warns that all banks need to be capable of proactively identifying risks arising from climate change and anticipating when and where they could emerge, as ultimately when they crystallise for the broader economy they crystallise for banks too.

• Business models: The PRA has observed that confidence in the viability and credibility of a bank’s business model is crucial for its clients and for the market. Mr Benjamin flags that in a world of rising rates, investment banks and wholesale firms are more exposed to market volatility and broad macro-economic shocks than retail and commercial banks are, and do not benefit so directly from higher interest rates. Firms should ensure that their business as it currently exists is operationally resilient before growing or changing significantly, before venturing into new products or markets.

Mr Benjamin concluded that ‘firms with a strong clarity of purpose, sufficient regard for the lessons of the past, a healthy dose of humility, and a keen eye to the future will tend to fare the best – but only time will tell’.