Check Archegos-style risks, Bank of England tells banks


General view of the Bank of England in London, Great Britain on October 22, 2021. REUTERS / Tom Nicholson

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  • BOE: lessons from the financial crisis poorly learned
  • BOE: bonuses must be linked to upgrades
  • Federal Reserve Raises Similar Concerns With U.S. Banks
  • Fed says it could take other action

LONDON, Dec. 10 (Reuters) – UK banks are due to complete a systematic review of the risks to their equity financing business by the end of March in light of the collapse of Archegos Capital Management, regulators said on Friday financial.

The bonuses should also indicate whether executives are making the necessary improvements in a timely manner, the Bank of England and the Financial Conduct Authority said in a letter to banks’ chief executives.

The New York-based investment fund led by former Tiger Asia manager Bill Hwang imploded in March after a drop in the value of its leveraged stock bets sparked a liquidity crunch within fund. This sparked a rush among Wall Street banks that had funded the deals and resulted in more than $ 10 billion in losses at several companies.

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“This episode demonstrates the importance for companies to invest enough in their risk management frameworks and their control infrastructures,” said the joint letter from the BoE and the FCA.

Regulators in Britain and elsewhere have examined the equity finance industry, including institutions that were counterparties to Archegos, and found weaknesses in risk management and inconsistent approaches to defining trading margin, indicates the letter.

Business strategies lacked coherence, were opportunistic and were not rigorously evaluated, he added. Customers were not screened properly for a potential reputational risk.

The U.S. Federal Reserve communicated similar concerns to U.S. banks on Friday in a letter, saying it was concerned that companies were accepting incomplete and unverified information from customer funds and could take action.

Many of these shortcomings were observed over a decade ago, and it is “very worrying” that the lessons of the then global financial crisis were not sufficiently learned, according to the British letter.

“Given the impact of these issues and the importance we attach to their resolution, we expect you to perform a systematic review of your equity financing business and its risk management practices and controls.” , said the BoE and the FCA.

The findings are expected to be reported to the Prudential Regulatory Authority and the FCA by the end of the first quarter of 2022, along with detailed remediation plans, if any, they added.

Some shortcomings are symptoms of a broader root cause, including a culture of risk where frontline executives are not responsible for risks taken, the letter said.

“For the avoidance of doubt, your review should cover all of the major blue chip brokerage activities, including, to the extent that you provide them, blue chip brokerage services and derivatives,” the letter said.

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Reporting by Huw Jones, editing by Andy Bruce, Kirsten Donovan

Our Standards: Thomson Reuters Trust Principles.


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