Prudential Regulation Authority Annual Report 2022/23

The Bank of England and its Prudential Regulation Authority (PRA) have issued the Prudential Regulation Authority Annual Report 2022/23. The report presents
– the key issues faced by the PRA in the previous year;
– the key activities performed by the regulator in view of its business plan and strategy;
– the PRA’s funding, resource availability, and independence status.
The report also includes the „Annual Competition Report“ which is a key deliverable since 2014 and presents data on how the PRA has performed in relation to enabling competition among supervised firms in the UK financial market.
Below is a brief summary of the key issues faced and activities performed by the regulator. Further information may be found in the report.
#### Key issues faced by the PRA
(1) During the reporting period, the first major shock was Russia’s invasion of Ukraine in February 2022, which had significant impacts on the global economy and the financial system – let alone the human costs on the part of Ukraine. The PRA’s focus has been on helping the UK Government implement financial sanctions and monitor firms affected by the invasion, including those operating in Russia and Ukraine. Furthermore, the PRA was involved in monitoring the commodity markets and the impacts on firms due to the large variability in market prices. Finally, a key focus was on the cushioning of the inflation impact on UK businesses, households, and people.
(2) Later in the 2022, the financial system experienced a second shock: the crisis in the LDI (Liability-Driven Investment) fund sector which occurred in the fall of 2022. As well known, the crisis was triggered by high government gilt yields and thus plumeting asset prices causing a significant mismatch in the assets and liabilities of LDIs. [Remark of the author: the high yields were triggered by an announcement that the government would severely cut tax rates of businesses to the detriment of the national debt, causing a surge in government bond rates].
(3) And finally, just at the beginning of 2023, the global banking sector experienced significant stress, with Silicon Valley Bank and several other U.S. banks failing and Credit Suisse being close to a wind-down. The PRA acted swiftly reviewing UK banks and ensuring capital adequacy and sufficient liquid positions to meet ongoing liabilities.
#### Key activities performed by the PRA
In summary, the key focus of this year has been stress testing in the financial sector. Stress tests were conducted to assess the resilience of banks and insurers to severe economic shocks. Results of the insurance stress test were published in January 2023, and the annual cyclical scenario (ACS) test for banks was restarted and published in September 2022 following the pause caused by COVID-19. Additionally, the resilience of the UK financial system to climate change risks and the transition to net zero was explored through the Climate Biennial Exploratory Scenario (CBES) for the largest UK banks and insurers.
Apart from stress testing, other significant activities included day-to-day forward-looking supervision on financial and operational resilience, cross-firm and thematic work, and important policy reforms. The Financial Services and Markets (FSM) Bill (now Act), aimed at creating a post-Brexit framework for UK financial regulation, was in progress through Parliament. Several landmark policy reforms were also brought underway, such as the Strong and Simple framework for smaller banks and building societies, the implementation of Basel 3.1 standards, and reforms to the Solvency II standards for insurers.
The PRA also focused on improving its own capacity, including efforts to streamline authorization processes, promote diversity and inclusion, and invest in data capabilities.
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To conclude the PRA notes that it welcomes any kind of feedback on this report, its activities, and / or its achievements through September 25, 2023.