The Bank of England has criticised UK banks’ risk management systems in a series of letters to chief executives following a year of market volatility that exposed weak spots in lenders’ defences.
Executives from the Prudential Regulation Authority, the BoE arm that regulates banks, wrote to lenders on Tuesday setting out the UK watchdog’s priorities for the year ahead.
In the letters, officials wrote that they had warned banks last year about deficiencies in their risk management and governance frameworks that were highlighted by the collapse of Archegos Capital, which caused $10bn of trading losses for global banks in 2021.
“During 2022, the market reaction to Russia’s invasion of Ukraine, and volatility in the nickel and long-dated gilt markets, reinforced the importance of a robust risk culture and sound risk management practices at firms,” the letters stated.
“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 PRA officials said they expected banks to undertake a thorough review of their counterparties and stress test counterparty exposure. The regulator said it would monitor how banks managed their exposure, especially to non-bank financial institutions.
In a separate letter sent to insurers, the BoE warned that underwriters’ ability to gauge catastrophe risks such as cyber remained “immature” and could leave them exposed to “outsized losses”. The bank added that it would work with the industry to manage risk better from non-weather related catastrophes.