The PRA is telling firms to prepare for a prolonged period of stress. While the recent FCA focus has been the increasing risk of mortgage defaults and the resultant risk to consumer harm and market stability, the PRA is tackling the issue from a slightly different angle. In a recent Dear CEO letter to Deposit Takers, it highlighted a number of 2023 priorities, but a significant focus was credit risk.
We are not surprised that this is the first item in an extensive list of priorities that the PRA feels firms should be addressing. There has been a large turnover of personnel in lending institutions since the global financial crisis and some memories may have faded. This has resulted in a significant experience gap. Whilst the PRA praises the responsible lending activities of many firms over recent years, it does have a long memory and has not forgotten that lenders were slow to change their underwriting practices after the crisis. While lenders responded to market shocks by tightening criteria during the pandemic, it is right to express concerns in the current economic environment, with increasing interest rates, higher cost of living, geo-political uncertainty and supply chain disruptions. In the current market, it is highlighting riskier product areas, such as retail credit card portfolios, unsecured personal loans, leveraged lending, commercial real estate, buy-to-let, and lending to SMEs as requiring close attention.
Just taking buy to let as an example, these borrowers have not only seen mortgage payments rising faster than rents, but their profitability has also been affected by the unwinding of tax relief over the last few years. The cost-of-living crisis and mortgage affordability is also hitting consumers hard. Credit card borrowing soared in November to its highest monthly level since 2004 and we expect that the December figures will show a further significant jump.
Finally, the PRA is also warning that it will be looking for firms early warning indicators, given that many credit risk metrics are backward looking. The PRA is telling firms to expect increased engagement with it, including targeted requests for enhanced data and analysis. The PRA approach could not be clearer – are you ready? Give us a call to see how we can help.