PRA's Dear CEO letter on 2024 Priorities for UK Deposit Takers

Ethan Donnelly -

11th January 2024 

The Prudential Regulation Authority (PRA) issued a thematic letter to CEO’s of UK Deposit Takers, detailing the key priorities for UK deposit-taking firms in the coming year. The primary focus of these priorities revolves around fostering resilient governance, effective risk management, and robust controls within firms to identify, assess, and mitigate risks in an increasingly complex operational landscape. 

These priorities, essential for navigating a complex and rapidly changing financial landscape, emphasise the need for firms to strengthen their basics with robust governance, risk management, and controls. As the regulatory environment becomes more demanding, the letter urges firms to ensure they have the necessary tools and controls to mitigate risk. Let's delve into the key focal points shaping the trajectory of UK deposit-taking entities in the year ahead. 

Key Themes: 

Governance and Risk Management: 

  • Boards and executives are urged to continually challenge and adapt their governance and risk management frameworks. 
  • The PRA highlights the importance of maintaining an appropriate risk culture to ensure safety and soundness. 
  • Succession plans for key positions in the Board and Executive are encouraged to sustain strong governance in case of personnel changes. 

Credit Risk: 

  • Firms are advised to proactively manage credit risk, considering uncertainties in growth, inflation, interest rates, and geopolitical tensions. 
  • Continuous monitoring of vulnerable segments, including cyclical sectors and key international portfolios, is emphasised. 
  • Heightened engagement with the PRA on credit and counterparty credit risk, including requests for enhanced data and analysis, is anticipated. 

Financial Resilience: 

  • Firms are urged to manage financial resilience to support businesses and households. 
  • Consideration of global banking sector events and upcoming changes in funding and liquidity conditions, including Basel 3.1 standards, is encouraged. 
  • Ongoing assessment of capital and liquidity positions, stress testing, and realistic contingency plans are expected. 

Operational Resilience: 

  • Firms have until March 2025 to demonstrate operational resilience within impact tolerances for all important business services. 
  • Boards and senior management should actively oversee operational resilience programmes, especially in the context of large IT transformations and outsourcing. 

Model and Data Risk: 

  • Effective model risk management (MRM) is crucial, with final model risk management principles coming into effect in May 2024. 
  • Firms are expected to assess and remediate shortcomings in their MRM frameworks. 
  • Robust controls over data, governance, and systems related to regulatory reporting are stressed. 

Climate Change Risks: 

  • Firms need to enhance climate-related financial risk management capabilities and integrate them into decision-making. 
  • Stress testing with relevant and ambitious scenarios to assess the impact of climate change is recommended. 

Other Areas of Focus: 

Resolution and recovery planning are highlighted as crucial, with a focus on the Resolvability Assessment Framework for larger firms and improvement of recovery planning for smaller ones. 

In conclusion, the PRA's 2024 priorities aim to ensure the resilience and adaptability of UK deposit-taking firms amid evolving economic, technological, and environmental challenges. Firms are expected to actively engage with these priorities to strengthen their risk management frameworks and safeguard the financial system.