The PRA’s supervisory priorities for international banks

On Monday 3 July, UK Finance was pleased to host the Prudential Regulatory Authority’s (PRA) Executive Director for Authorisations, Regulatory Technology, and International Supervision Nathanaël (Nat) Benjamin to speak to our members, associate members, and key stakeholders.

Nat’s speech, entitled ‘Yesterday’s logic’, touched on many of the PRA’s 2023 supervisory priorities, and key challenges and opportunities for international banks operating in the UK. This event, and the Q&A which followed, demonstrated the collaborative and open approach that the PRA and Bank of England continue to adopt in engaging with the sector.

Nat raised three key areas of focus for international banks to consider:

Firstly, he articulated the significant effects of the current macroeconomic environment, and what that means for banks operating in the UK. Nat supported this point by relaying that developments in the US are a key focal point in UK markets due to the US’ breadth of influence and connectivity with the UK. This point also relates to one of the PRA’s 2023 priorities: UK financial resilience. This is because changes in the US could impact the level of counterparty risk, the UK’s global position in markets, and international political stability. Crucially, if the consensus of US markets remains positive, then it could disadvantage the UK in attracting investors. Wholesale banks should therefore be mindful of the macroenvironment and evaluate their business models against these challenges.

Secondly, Nat discussed the indirect impacts of the supply of commodities on banks. The supply of commodities is changing, which is causing banks to shift how they operate as the transition to green energy is altering industrial operations and the availability of goods. This dynamic is relevant to another of the PRA’s supervisory priorities – the financial risks arising from climate change. He emphasised the importance of banks adequately hedging their risks and adjusting them accordingly because “With hedges comes margin and with margin comes volatility, therefore costs should always represent the risks”.

Thirdly, Nat highlighted the need for banks to have realistic, and viable business models. While digitalisation will continue to transform financial services, smaller firms may be at a disadvantage compared to larger organisations that have greater resources to advance. He also spoke about the increasing temptation for firms to move out of their ‘DNA’ or standard business practices, and into areas such as cryptoassets in the pursuit of growth. Nat encouraged firms to be cautious of seeking new ventures, such as product and operational diversifications, without clarity and detailed considerations of the risks and benefits.

Nat’s overarching message was that firms should be cautiously optimistic of the changing UK financial services industry. The last year has proven that the UK’s financial system is robust, with competitive markets, investor security and industry-led reforms. However, firms are exposed to volatility and must have flexible, realistic, and viable business models. Banks should not underestimate the value of effective core functioning services and thorough risk management as assets for growth.