The Bank of England has sharply criticized British lenders for failing to address risk management blind spots exposed by the multibillion-dollar hedge fund collapse, energy price shocks and other crises that have rocked financial markets in recent years.
The reprimand, delivered in a letter to bank leaders, highlighted the BoE’s unease about traditional financial institutions’ exposure to hedge funds, pensions and other non-bank financial institutions expected to be zero for the next financial crisis.
The letter was published on the day Andrew Griffith, the City minister, vowed to tackle another budding risk in the financial system by bringing forward a full discussion document on cryptocurrency regulation in “weeks not months”.
Policymakers are generally uncertain about the impact of inflation, recession and rising interest rates on the traditional banking system, which was forced to increase capital levels and overhaul risk management practices after the 2008 financial crisis.
But officials are concerned that banks are not doing enough to mitigate risks that could bleed from other corners of the financial market. The BoE has announced it will conduct a landmark exercise next year to identify potential risks.
“During 2022, the market’s reaction to the Russian invasion of Ukraine, and the volatility in the nickel and gilt markets for a long time, reinforce the importance of a strong risk culture and good risk management practices in companies,” the letter said.
“Despite regular messaging from the PRA (Prudential Regulation Authority) on the subject, these events show that companies continue to inadvertently gain large exposures and concentrate on single partners, without knowing the risks that may occur.”
Officials have warned the bank of deficiencies in its risk management and governance framework highlighted by the collapse of Archegos Capital, which has led to a $10bn trading loss for global banks by 2021.
PRA officials said banks will review their exposures thoroughly and added that the authority will monitor how banks manage the risks, especially from non-bank financial institutions.
In a separate letter sent to insurers, the BoE warned that the ability of underwriters to measure the risk of disasters such as cyber attacks remains “immature” and could lead to “significant losses”. The bank added that it will work with industry to better manage risks from non-weather-related disasters.
Appearing before the Finance select committee on Tuesday, Griffith gave new details on how the government is tackling risks in the volatile cryptocurrency sector.
The UK will publish two papers in “weeks not months” – one on how to regulate private cryptocurrencies such as Bitcoin and another on central bank digital currencies, Griffith said.
He added that the regime would go further than the long-awaited Markets in Crypto Assets (MICA) regulation of the European Union by including measures on decentralized finance and that the UK’s approach would be “more nimble” than MICA, which has been on the drawing board ever since. . 2020.
The goal is to “clearly telegraph the risks” associated with private cryptocurrencies, “but not to legitimize” them, he said. He emphasized that it is still a question of “if not when” a central bank digital currency will be created, and that the currency will be issued in a way that “will not allow the government to see” what individuals are doing. at.
Griffith also defended the more controversial elements of the Edinburgh package of financial services reform, promising that a review of the rules on the responsibility of senior managers for failures on the watch will look at issues such as the time to process applications for approval and the number of people. protected by the rules.