PRA tells specialist lenders to ‘prepare for prolonged’ period of stress

In a Dear CEO letter, the Prudential Regulatory Authority (PRA) put traditionally higher risk credit lenders into buy-to-let, unsecured, commercial, credit cards and lending to Small to Medium Enterprises (SMEs) on notice of higher scrutiny.

The bank said: “The impact of increasing interest rates, inflation and high cost of living, geo-political uncertainty, and supply chain disruptions is expected to pose challenges to firms’ credit portfolios. Firms need to be ready for a prolonged period of stress.”

The watchdog’s executive director David Bailey and director Charles Woods told firms to expect more regulatory engagement and added that it would be looking at early warning indicators and asking lenders for more targeted data and analysis.

It warned lenders to ensure collections and credit loss provision monitoring is robust and portfolios closely monitored.

PRA: ‘Firms must take proactive steps’

Individual lender financial resilience will also be under scrutiny, it said, through ongoing assessment of individual firm’s capital and liquidity positions as well as how these may evolve in light of potential headwinds.

The bank said: “We expect firms to take proactive steps to assess the implications of the evolving economic outlook on the sustainability of their business models.”

The bank’s Annual Cyclical Scenario stress test, the results of which will be published in Q3 2023, remains a core tool for the PRA to explore the financial resilience of major UK banks and building societies, it added.

In the meantime, supervisors will continue to work with firms as they seek to enhance their own testing and scenario development capabilities in response to the current environment.