David Bailey, BoE Executive Director for UK Deposit Takers Supervision, has delivered a speech including many references to Eurovision entries but substantively on credit risk at The Building Societies Association Conference.
In its January dear CEO letter to UK deposit takers, BoE placed credit risk at the top of its list of Supervisory Priorities. Despite recent pressures on consumer confidence, PRA data does not yet indicate that a material amount of credit risk is crystallising. However, the speech highlighted some good practices BoE has seen in firms proactively managing this risk within their portfolios:
- Using early warning indicator frameworks that highlight emerging risks in portfolios at an earlier stage than more traditional, backward-looking credit metrics;
- Reviewing credit risk management frameworks to ensure they remain appropriate, with robust governance and controls around credit and affordability assessments;
- Reviewing lending criteria to ensure they remain prudent and sustainable;
- Assessing concentration risks in their portfolio. This is especially important for firm-specific concentrations, for example in the type or location of their customer base;
- Regularly analysing whether the levels of credit loss provisions are sufficient and ensuring these are recognised in a timely manner;
- Early outreach to customers whose finances are most vulnerable in the current circumstances whilst bearing in mind relevant FCA guidance;
- Ensuring that customer support and collections arrangements are appropriately scaled so they can expand rapidly if need be.
While the speech predominantly focused on the short to medium term, Bailey also encouraged firms to consider how current conditions may impact demand for services over the longer term and what this might mean for firm business models. He also confirmed that this is an area BoE will be increasingly asking about as a supervisor.
Bailey also discussed BoE’s approach to two important policy developments: Basel 3.1 and the Strong and Simple prudential framework for smaller firms.
Basel 3.1 is set to make significant changes to how firms calculate risk-weighted assets for the purposes of calculating risk-based capital ratios. The feedback from the consultation on implementation of the new standards is to be published in due course.
The Strong and Simple project will create a proportionate and less costly prudential framework for domestically focused non-systemic firms. Bailey encouraged societies to respond to the Phase 1 consultation, which closes 30 May 2023, and noted that a Phase 2 consultation will follow in H1 2024.