Dear Chief Risk Officers | Release Date: 10th September 2024
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The Prudential Regulation Authority (PRA) has issued a letter addressing Chief Risk Officers of non-systemic UK Deposit Takers (UKDT) regarding the findings from an Internal Audit (IA) review of their Credit Risk Management Frameworks (CRMF). The review, initiated due to uncertainties in the macroeconomic environment, aimed to assess the effectiveness of controls in key areas such as credit assessments, approval processes, and portfolio management.
The IA involved 33 non-systemic banks and building societies, representing 13% of the sector’s lending exposures. Findings indicate that 53% of issues identified were moderate breaches (Yellow), with smaller proportions rated as significant or material. Key areas requiring improvement include affordability assessments, quality assurance processes, management information, credit risk appetite calibration, lending policy governance, and contingency planning for collections. The findings particularly emphasise the need for firms to enhance controls in response to evolving economic conditions like inflation and rising interest rates.
Key takeaways for affected firms include a need to reassess and strengthen their CRMF controls, particularly in the aforementioned areas, ensuring alignment with market trends and strategic priorities. Immediate review and improvements in these areas are recommended to mitigate potential risks.
Key Takeaway:
Firms are urged to review their CRMF controls, focusing on affordability assessments, quality assurance, and contingency planning, to ensure they are well-prepared for macroeconomic challenges.