The Bank of England criticised UK banks who failed to take action to fix the risk management system flaws exposed by the Archegos scandal.
In a Monday letter to major lenders, the BOE stated that it had instructed them to improve their market businesses by December 2021. This was months after Archegos, an investment firm, failed because of highly leveraged bets gone wrong.
The central bank had conducted a review that revealed weaknesses in the risk management process which contributed to the collective losses of more than $10bn resulting from the Archegos failure.
The move comes at a time when regulators around the world are warning about the increased risks for markets, as economies adjust to a new era of higher interest rates.
The BoE stated that it was disappointing that previous messages had not been addressed fully.
The UK gilts crises of last year was also cited as proof that “there’s still some work to be done in applying these lessons for fixed-income business”.
In September 2022, the BoE had to intervene by launching a £65bn programme of bond purchases to stop the plummeting UK gilt price after a “mini” budget, then announced by the government, triggered a sale-off among highly leveraged pension funds vehicles known as LDIs.
The LDI debacle prompted the central bank’s review of the fixed-income business of banks to include a broader look at issues raised by the crisis.
The BoE announced the findings of the review, saying it had found “a number of shortcomings” regarding the risk management of clients (known as counterparty risks) as well as failings in the “margining agreements”, which determine the amount clients owe each time.
The government stressed that companies should “extend enhanced due diligence standards, client disclosures, and counterparty risks management controls beyond what has been introduced for hedge funds clients in equity financing”.
The definition of “all clients” should include all types of clients in secured lending and other trading businesses.
The BoE stated that many banks have not made enough efforts to determine how their counterparty risks are concentrated on clients and collateral.
The report also stated that some lenders failed to implement “formal controls”, which would limit their exposure to certain clients or assets, and demanded action.
The BoE stated that “firms should improve the way they evaluate their trading and counterparty risk, by incorporating new and wider stresses into their processes of risk management.”
The BoE has criticised lenders who have “inadequately” monitored certain types of risks, and for not having clear policies, such as the discounts that they apply to collateral deposited with the bank.
David Bailey, head of UK Deposit Takers and Nathanael Bennet, head of BoE international supervision sent the letter.