The PRA's Fastest Growing Firms Thematic: key themes and actions for banks

24 June 2019

On 12 June the PRA fed back to firms on their “fast growing firms” (FGF) thematic, which has involved 20 of the fastest growing UK challenger banks. The review raised concerns around how firms manage the interlinking facets of risk appetite, stress testing and business model. 

The PRA noted that most challenger banks were overly optimistic on the potential impact of a stress event, most notably under a market-wide stress in relation to – a) the impact on impairment rates; b) the ability to raise additional capital; and c) the ability to widen margins. Challenger banks are generally solely UK based and concentrated in niche markets and many have not weathered a financial downturn. Thus their risk management and stressed financial impacts are largely untested. The PRA found management often could not sufficiently explain the rationale behind the assumptions made within stress tests as well as management actions being then poorly defined and lacking appropriate trigger frameworks that may then hinder the ability of these firms to respond under a stress. These observations – particularly those on senior management oversight and the integration of stress testing into wider risk management – are largely consistent with those raised by the PRA in the early years of the Bank of England’s Concurrent Stress Test (‘CST’) undertaken by the large UK firms.

Similar themes were noted on risk appetite and oversight frameworks, which were generally viewed as under-developed. There were also concerns that forbearance practices in some cases may be masking true levels of arrears, and the general quality of MI was deemed insufficient to truly manage the risk within portfolios. Again, the lack of experience in dealing with a financial downturn through which to test and improve risk management practices was highlighted. 

Another common theme was the concentration of respondent firms in niche products that may be particularly exposed to economic downturns. To understand and mitigate this risk, firms have been asked to consider risk concentrations in their stress testing and provisioning models. This is not currently common practice and we believe this may present a fair degree of modelling complexity for firms.

On the liabilities side of the balance sheet, the PRA found that most firms in this group rely on price-sensitive retail deposits with little consideration of how changes in that funding market may impact the business model in future or under a stress event. This observation, combined with those noted above on the impact of market wide stress events, suggests a potential lack of understanding of all the risk drivers across the business on a BAU and stressed basis.

At PwC we have seen an increase in supervisory activity among small to mid tier banks focusing on risk management, risk appetite and stress testing in recent months and do not expect this to abate any time soon. All firms should look at the FGF letter and consider what action they should take. If you don’t already, its time to consider business model, risk appetite and stress testing more holistically. The issues noted are inter-related and iterative elements of a bigger risk management picture, of which the key regulatory documents (ICAAP, ILAAP, RRP) are just a snapshot. 

Stephanie Henderson-Begg | Director
Profile | Email | +44 (0)7711 562280

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