Banks have yet to improve their risk management and learn from the financial crises that hit the markets, Bank of England regulators warn.
The Russian invasion of Ukraine and the turmoil in the nickel and UK government bond markets have exposed risk weaknesses, according to the Banking Prudential Regulatory Authority (PRA).
In letters to executives of banks, insurance companies and other financial firms last year, the regulator said it had warned banks about weaknesses in their risk management and governance systems.
The weaknesses were exposed in the collapse of Archegos Capital, resulting in an £8.2bn loss in 2021.
“In 2022, market reactions to the Russian invasion of Ukraine and volatility in the nickel and long-term gold plating markets have heightened the importance of a robust risk management culture and sound risk management practices among companies,” the letters say.
“These events have demonstrated that firms inadvertently continue to create large and concentrated risks for individual counterparties without fully understanding the risks that may arise.”
Letters outlining PRA priorities for 2023 warn businesses that they can continue to support UK businesses and consumers in a difficult economic environment.
“Businesses must be prepared for an extended period of credit stress,” writes PRA.
“Companies should expect more engagement from us, including targeted requests for advanced data and analytics.”
They told insurers that the mini-budget, which led to a crash in the UK bond markets and exposed liquidity problems in pension fund-focused investment (LDI) strategies, exposed gaps in companies’ risk management systems that needed to be addressed.
The PRA has described risk management in events such as cyberattacks as “immature”, resulting in high losses.
The PRA’s warning came after Treasury Secretary Andrew Griffith said the government’s proposed financial reforms could curtail rules introduced in the aftermath of the 2008 financial crisis to hold bankers accountable for risky decisions.
The underlying principles of the “senior management certification system” will remain the same, he told the Treasury Department’s selection committee. “It seems completely unacceptable that we should have … certification for those involved in the infiltration of systemic risk into the financial system.”
He said the focus would be on making the rules “more proportionate” and “balanced”, especially for smaller, less risky banks.
The minister backed proposals to change the foreclosure rules that would help protect retail banking lenders from riskier avenues of investment.
Critics fear that ministers are risking a repeat of the 2008 financial crisis by lifting or relaxing many of the security measures put in place to prevent a repeat of the crash, leading to a multibillion-dollar taxpayer bailout.
Source: I News
I am Moises Cosgrove and I work for a news website as an author. I specialize in the market section, writing stories about the latest developments in the world of finance and economics. My articles are read by people from all walks of life, from investors to analysts, to everyday citizens looking for insight into how news will affect their finances.