PRA publishes its 2023 priority letters – what should deposit takers know?

The New Year has started with a stark reminder to deposit takers about the current challenging economic conditions and a period of stress ahead.

A Dear CEO letter published by the Prudential Regulation Authority on 10 January 2023 sets out the priorities for deposit takers in 2023 in the context of the challenging economic conditions of higher interest rates, inflation, cost of living increases, geopolitical tensions and supply chain challenges.

What should deposit takers be aware of?

Deposit takers should pay particular attention to credit risk management with ongoing assessment to identify potential problems, swift credit loss provisioning and scaled up collections and recoveries capabilities.  PRA expects to be prioritising supervisory assessments (which means asking for more data) on credit risk management, particularly in those areas traditionally more susceptible to losses in a market downturn, for example unsecured lending, buy to let and small business lending. 

With the lessons of 2008 in mind, focus will also be on wholesale funding and capital and liquidity positions to manage ‘economic headwinds’.  The PRA will want to spot signs of stress early and look to understand the sustainability of business models in these challenging conditions. 

How will this impact firms?

This links to firms own risk management and governance capabilities. Systems in place should be capable of assessing exposures and stress testing scenarios. The PRA has reminded firms that weak risk management has led to large and concentrated exposures being built up and not managed, “We will focus on firms’ ability to monitor and manage counterparty exposures, particularly to non-bank financial institutions.  ’Non-bank’ in this context means other financial services institutions who may be prudentially supervised by the Financial Conduct Authority, which has also upped its supervisory assessment of financial resilience, and real economy firms.  Executives and Boards need more focus and scrutiny on this area to spot potential issues and act now. 

The remainder of the PRA’s Dear CEO letter has a more usual list of topics such as continuing work on ESG, Operational resilience and model risk. You can find out more and read the full letter here.

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