PRA sets out banking agenda for 2024-25

The PRA published its 2024-25 business plan (BP) on 11 April 2024, setting out its 2024/25 priorities. These include financial resilience, risk identification and international policy development, competitive markets and international competitiveness, and modernising the regulator’s operations.

The BP provides an overview and update on a number of ongoing priorities, including: Basel 3.1 implementation; the Strong and Simple framework; ring-fencing reform; risk management; operational risk and resilience; climate risk; and diversity and inclusion (D&I).

What does this mean?

The BP builds on existing themes and priorities and covers the following issues, among others.

Financial resilience - Basel 3.1 final implementation and beyond

The PRA aims to finalise the Basel 3.1 standards, with plans to publish a near-final policy for credit risk, the output floor and Pillar 3 and reporting requirements in Q2 2024 and finalise the rules in H2 2024. It will also review and may update Pillar 2A methodologies for banks, with a view to consulting on any proposed changes in 2025.

Further initiatives include advancing the Strong and Simple framework for Small Domestic Deposit Takers, with a consultation on a simplified capital regime scheduled for Q2 2024.

Managing a challenging macroeconomic environment

The regulator will continue its focus on risk management capabilities. A particular focus will be banks’ exposures to non-bank financial institutions (NBFIs). The PRA will assess the risks from illiquid private equity financing and private credit. In 2024 the PRA will also continue to review regulatory policies on trading book risk management, controls and culture to ensure they are suitably robust. The PRA also highlights geopolitical risk as an issue it will focus on, reflecting heightened geopolitical uncertainties.

The PRA will continue its supervision of banks’ liquidity positions in light of the market stress seen in 2023. Supervisors will assess whether firms have considered changes in depositor behaviour and the implications for their funding positions.

In light of the uncertainties around credit quality in certain markets the PRA will be continuing assessments of banks’ credit risk management practices and monitoring of vulnerable portfolios such as buy to let, credit cards, unsecured personal loans, SMEs, leveraged lending and CRE.

Ring-fencing reform

With HMT the BoE is updating the ring-fencing regime. The PRA has proposed new rules and updates to SS8/16 to align with HMT's legislative changes, aimed at safeguarding ring-fenced bodies from risks in overseas operations. The policies will be published after the legislation is enacted.

The PRA will consult on ring-fencing regime changes after a cost-benefit review and continue providing HMT with technical advice to refine legislation and evaluate long-term reform feedback.

Model Risk Management (MRM) - SS1/23 and artificial intelligence (AI)

In 2024, the PRA will assess firms’ embedding of the MRM expectations in SS1/23 and evaluate the impact of AI on model risk.

It will conduct the third edition of the joint survey on machine learning with the FCA in Q2 2024. This will enable the regulators to further explore how best to address the issues/risks posed by AI.

Operational resilience

The PRA will take on direct oversight of critical third parties, aiming for full implementation of the regime in 2025.

Banks will need to meet the broader operational resilience framework by March 2025. The BP emphasises the need for continuous monitoring and rigorous testing, including ongoing threat-led penetration testing (CBEST and STAR-FS) and the cyber questionnaire (CQUEST).

Climate-related financial risk

The PRA will commence work to update SS3/19 in 2024 and publish thematic findings on banks’ processes to quantify the impact of climate risks on expected credit losses.

D&I

The BP emphasises the importance of D&I for governance, decision-making and risk management. The PRA says it will review feedback to CP18/23, and will ‘provide a further update in due course’.

Senior Managers & Certification Regime reform

Following DP1/23, the PRA confirmed it will launch a joint consultation with the FCA on potential changes to the regime in H1 2024.

Approach to international banks

The PRA will revise its approach to UK branches of international banks, incorporating lessons from the failure of the Silicon Valley Bank. The PRA also plans to clarify roles for group entity senior manager functions and expectations for booking arrangements.

Banking Data Review

The PRA intends to initiate the first phase of its review in H2 2024. The aim is to simplify existing reporting requirements and incorporate lessons from recent market developments. The next phases will address credit risk and other regulatory areas.

Digital money

The PRA will support the BoE's broader efforts to further innovation in money and payment systems, including work on wholesale payments and settlements, and their interaction with retail payments. It will also finalise and implement changes to international standards regarding banks’ cryptoasset exposures.

What do firms need to do?

Prepare for Basel 3.1: Continue preparations for Basel 3.1 by updating internal models and capital frameworks in anticipation of the PRA's policy updates.

Update governance, controls and risk frameworks: Ensure robust governance, controls and risk frameworks, tailored to evolving risks firms are facing.

Invest in technology and skills: Allocate resources towards technology and specialised skills to manage and mitigate financial and non-financial risk.

The PRA's BP reflects a busy regulatory agenda ahead. The majority of the areas of focus for 2024/25 will be familiar to banks. Areas such as Basel 3.1 implementation and preparations for the operational resilience framework have been priorities for a number of years and firms’ focus should be on ensuring readiness for the 2025 deadlines.

The need for banks to assess and manage a wide range of risks is a key theme from the BP. For some time the PRA has been focused on issues such as counterparty credit risk management (particularly to NBFIs) and the broader credit risk environment, These issues will continue to figure heavily in supervisory dialogues. However, recognising the fact that recent years have seen a number of market and geopolitical events, the PRA is likely to push firms to show they are considering and managing an uncertain risk outlook.

The PRA’s policy agenda also remains very active. In addition to finalising Basel 3.1 and S&S the PRA will proceed with reforms such the BDR (the outcome of which could result in material changes to the regulatory reporting regime) and will continue to assess the implications of technological developments such as AI and digital assets.

Navigating the PRA’s busy agenda will require banks to invest in risk management and data capabilities and review the adequacy of current compliance and controls frameworks.

“The events of 2023 (including the high-profile failures of Silicon Valley Bank (SVB) and Credit Suisse (CS)) demonstrate the importance of a focus on resilience – and while I am encouraged by how the UK banking and insurance sectors have remained stable through a stressful period, we cannot take this for granted.”

Sam Woods, Chief Executive, PRA