The Bank of England’s Prudential Regulation Authority has written to chief executives setting out its “planned work for 2023” in an “operating environment for firms that remains challenging”.  

The body says: “The impact of increasing interest rates, inflation and high cost of living, geopolitical uncertainty, and supply chain disruptions is expected to pose challenges to firms’ credit portfolios.   

“Firms need to be ready for a prolonged period of stress.”  

The document sets out a wide-ranging list of priorities that includes risk management in buy-to-let lending, exposure to single counterparties, the launch of real-time gross settlements, and the implications of the Financial Services and Markets Bill, which is making its way through Parliament.  

The joint letter was sent out this week by the PRA’s executive director, UK deposit takers David Bailey and director, UK deposit takers Charles Woods.  

The pair write that in recent years events like the pandemic, have led to firms tightening underwriting standards, boosting forbearance tools, and increasing operational preparedness for collections.   

But they warn that “these enhancements are untested under the current combination of risk factors”.  

The PRA says this year: “Our assessment of firms’ credit risk management will include a focus on traditionally higher risk areas including retail credit card portfolios, unsecured personal loans, leveraged lending, commercial real estate, BTL, and lending to small- and medium-sized enterprises.   

“We will also look at firms’ early warning indicator frameworks given many credit risk metrics are backwards-looking.”  

The body’s focus on financial resilience “will include the impact of evolving retail and wholesale funding conditions, as well as scheduled maturities of drawings from the Term Funding Scheme with additional incentives for small – and medium-sized enterprises in the coming years.”  

It adds that the Bank’s Annual Cyclical Scenario stress test, which will be published in the third quarter of the year, “remains a core tool for the PRA to explore the financial resilience of major UK banks and building societies”.  

The regulator says that the $36bn collapse of the US-based Archegos Capital Management investment firm and the Russian invasion of Ukraine, among other events last year, “reinforced the importance of a robust risk culture”.  

But it writes: “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.   

“In 2023, firms must ensure that those lessons from past crises are definitively learned in full, and thoroughly embedded across the first and second lines of defence.  

“We will focus on firms’ ability to monitor and manage counterparty exposures, particularly to non-bank financial institutions.”  

The body reconfirms that the Bank will introduce real-time gross settlement through ISO 20022 messaging in CHAPS on 19 June.  

It says: “We expect firms to be ready for this change, ensuring cut-over to the new messaging standard without interruption to customer payments or liquidity management. This includes completing all necessary testing and participating in dress rehearsals and go-live events in full.”  

The regulator adds that its internal ratings-based models this year will “continue to focus on three key workstreams: the implementation of IRB hybrid mortgage models; the IRB roadmap for non-mortgage portfolios; and IRB aspirant firm model applications”.  

It says from this month, as part of its 2022/23 business plan, it has “updated our approach to categorising the ‘potential impact’ of firms, reducing the number of categories from five to four.  

The body adds: “We have also refined our risk assessment framework and our core assurance work.   

“Where this results in any changes to the supervisory workplan for any individual firm, we will communicate this directly to the firm in due course.   

“Until they are informed otherwise, firms should continue to work with the workplan communicated to them following their last periodic summary meeting.”  

The regulator also points out that the Financial Services and Markets Bill, which is currently being considered by Parliament and, if passed, “will introduce a new secondary competitiveness and growth objective for the PRA”.  

It adds: “The new objective would require the PRA to act in a way which, subject to aligning with relevant international standards, facilitates the international competitiveness of the UK economy and its growth in the medium to long term.  

“If appropriate, the PRA’s supervisory approach will be updated to reflect changes that are made to its statutory objectives.”