FIN.

PRA writes on risks of fast growing firms

PRA has written a Dear CEO letter relating to what it calls “fast growing firms”.  These comprise 20 non-systemic deposit taking firms which have different business models and activities, most of which show faster asset growth than the market as a whole. PRA carried out a review to test the financial resilience of the firms, and also to enable it better to understand the markets in which they operate.

The review used the ICAAP stress testing scenario that BoE had published for application to major banks.  The results suggested the firms needed to strengthen their stress analysis and stress management capabilities. Most of them seemed overly optimistic about the impact of a stress scenario and did not show, or properly define, they understood stress drivers and actions for management in cases of stress.

It also looked at asset quality reviews.  It found some firms’ risk appetites did not fully capture risks or have metrics to enable the level of risk to be captured. Several firms had untested collection capabilities and some showed weaknesses in underwriting of commercial loans.  Also, PRA found MI tended not to be detailed enough to enable identification of potentially vulnerable segments.

Finally, PRA looked at the funding and lending analysis, which was consistent with previous studies. It showed some lack of diversity in funding sources and expectation of ability to raise more funding over the years.

PRA has written this letter to inform firms of its views, and its intent to follow these up in supervisory engagement and its upcoming conference for non-systemic UK banks and building societies.

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Roseyna Jahangir