The Prudential Regulation Authority (PRA) has criticised City banks’ approach to risk management despite constant warnings on the issue.
In a letter sent to bank executives in the City, the Bank of England’s regulatory arm set out its priorities for the New Year.
Last year only “reinforced the importance of a robust risk culture and sound risk management practices at firms” the PRA said, citing Russia’s invasion of Ukraine, volatility in the nickel market and the long-dated gilt market.
But despite “regular messaging” 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 said.
“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” it stressed.
“We expect firms to reflect on their risk management, governance, and control frameworks accordingly” the PRA said, adding “this should include a comprehensive review of onboarding and due diligence practices, as well as counterparty pricing and margining frameworks.”
On the crypto markets the PRA said the number of firms offering products continues to grow, “presenting new challenges for risk management”.
“We will continue to monitor firms’ use of new technologies, and advancements in asset tokenisation” it said.
Another area of interest included in the PRA’s letter was “financial risks arising from climate change”.
“Last year’s volatility in commodities markets provides an illustrative example of the types of risk that could crystallise for some firms with commodities exposures, in the context of the energy transition,” the PRA said.
It added that banks should take action proportionate to the nature of the risks they face.