These actions by supervisors to batten down the hatches after market instability align with their ongoing drive for banks to simplify their booking arrangements and strengthen related governance and risk management frameworks, improving resilience to any further disruption.
This has been visible for some time in the PRA’s and ECB’s evolving expectations and is therefore not a new topic on the supervisory agenda. However, recent scrutiny has forced some banks to invest significantly to improve their approaches in these areas, and has in turn raised supervisory expectations for all banks. Despite some banks having made real progress, supervisors continue to find that others still too often operate with complexities arising from historic acquisitions, tax structures and legacy booking arrangements. As a result, we do not expect any reduction of supervisory vigilance in this area.
Both the ECB and PRA have conducted major thematic reviews in recent years on banks’ booking arrangements. The ECB, through its recent desk mapping review, is continuing with investigations into firms’ risk-shifting techniques and reliance on other group entities. Although we expect the findings of this review to be taken forward on a bank-by-bank basis, it is likely to drive further changes to booking models for large banks. In the UK, the PRA continues to ask banks to complete self-assessments against its current expectations - particularly around controls, senior manager accountability, risk oversight and management information. Most notably, banks still find it challenging to meet basic supervisory expectations, such as ensuring booking arrangements are transparent, permissible or “intended” transactions are clearly defined, and they establish an appropriate balance of preventative and detective controls to ensure adherence to their policies.