On 21 January 2025, the UK’s Prudential Regulation Authority (PRA) published two supervisory letters outlining 2025 priorities for international banks and UK deposit takers, respectively.
In this note, we look at some of the common themes which the PRA identified for both of these types of institutions, as well as the more specific concerns raised.
Common Priorities
Risk framework: The PRA has identified the global interest rate environment, geopolitical events and technology changes (in particular artificial intelligence(AI)) as key factors for banks’ risk frameworks to manage. Interestingly, the supervisory letters also identify a firm’s “risk culture” as a topic for boards to consider, and whether this could be the root cause of material control weaknesses. This implies that the need for a more qualitative review of a bank’s culture may be required.
Credit risk: Counterparty credit risk involving “non-bank financial institutions” (for which read: private equity and credit) is also identified as a focus area for the PRA, and commercial real estate is identified as another credit risk area.
Data: Unsurprisingly, poor data is also identified as a root cause of risk issues. The PRA reminds firms of the importance of being able to aggregate data properly to ensure that the board and managers are working with a complete picture of risk. The PRA has also been explicit in saying that the quality and accuracy of data is of particular concern where these feed into AI tools.
Liquidity: The PRA has also identified liquidity resilience as another area of focus. In particular, it said that the proposed changes to the UK’s funding and liquidity landscape require banks to seek assurance from their treasury and risk management functions regarding their balance sheet management. This is driven by the Bank of England’s proposals to move to a demand-driven framework for supplying reserves through repo operations, and the continued quantitative tightening reducing the level of available central bank reserves.
Operational Resilience: Banks will not be surprised to see operational resilience continuing to be included as a priority area, with the PRA flagging the March 2025 deadline for firms to show they can operate within their impact tolerances for their important business services. The PRA emphasised the need to ensure that operational resilience is a key board consideration on any business expansion. Third-party providers (including intra-group providers) are also identified as a key area of risk that firms need to be considering, including being “mindful of the financial health of their suppliers”. This may require firms to revisit the type of ongoing diligence they conduct on material third parties.
Basel 3.1 delay: Building on the PRA’s previous announcement of the 12-month delay to UK Basel 3.1 implementation (pushing this back to 1 January 2027 from 1 January 2026), the PRA clarifies that (i) other immediate deadlines (e.g., on data submission) can also be treated as paused; and (ii) transitional periods will be reduced to ensure that “full implementation” still occurs on 1 January 2030. Firms can expect further communications from the PRA on the implications of this delay during 2025.
International Banks
In addition to the priority areas identified above, the PRA flagged the following topics as being of particular concern to international banks:
- Counterparty credit risk is still seen as a common area of weakness, with firms needing to make sure they are working to identify control gaps and put in place “holistic remediation”. Particular attention is drawn to the PRA’s 2024 thematic review on private equity-related financing activities. International banks should expect further scrutiny on this topic in 2025.
- Turning to operational resilience, the PRA reiterated its position that UK branches should ensure they deliver “similar outcomes” to those required of UK-incorporated banks.
- The PRA also flags that in 2025 it will be finalising updates to its current Supervisory Statement 5/21 regarding its approach to branch and subsidiary supervision.
UK Deposit Takers
In addition to the priority areas identified above, the PRA has flagged the following topics as being of particular concern to UK deposit takers:
- The need for banks to ensure that their credit risk management systems both (i) continue to capture the relevant credit risk factors for their credit risk portfolios (noting that underlying models may not have been updated over time); and (ii) capture longer-term risks such as climate change.
- Staying with credit risk, the PRA have stated that, in addition to commercial real estate, there will be a focus on credit risk management practices for funds lending, specialist lending, buy-to-let, unsecured retail, SME and mid-corporates and leveraged lending.
- Senior management functions (SMFs) can expect engagement from the PRA regarding how well a firm’s model risk management aligns with the PRA principles contained in its Supervisory Statement 1/23.
- Finally, the PRA identifies the need for deposit takers to focus on how they will manage the significant maturities due in 2025 under the 2020 market notice “Term Funding Scheme with additional incentives for SMEs”, and in particular on their approach to collateral management for collateral released under this scheme.
Comments
Firms should ensure they work through the PRA letters relevant to them and ensure that, as a minimum, the priority areas identified by the PRA are reflected in their current risk framework. Firms should also ensure that their boards are updated on the relevant PRA focus areas and expect to discuss these topics with the PRA in their periodic summary meetings (PSMs).
However, the key area for banks will likely be the delay to Basel 3.1 implementation and whether this delay will result in any material changes to the PRA’s approach. Whilst firms are encouraged to “continue to work through the potential impact” of Basel 3.1, there is a clear need for clarity from regulators as to whether there will be any material changes so firms can manage these projects effectively.
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