Welcome back to Risky Business, in which we take you through some of the headlines impacting the banking industry. Read on as we take stock of the Q1 reporting and the broad outlook from some banks over the course of reporting season; a quick overview of the FCA's and PRA's strategic priorities with publication of their respective business plans; and find out how the Bank of England is attempting to take a more unified stress testing framework following the launch of its well-received system-wide exploratory scenario exercise last year
Q1 Earning calls roundup - As Good as it Gets?
Given the tumultuous opening to 2025, earnings calls updates are being closely scrutinized to discern the impacts from the monumental shifts underway in the longstanding international, open market, free trade-based order. As we approach the end of reporting season, a pervading sense of caution from the economic uncertainty looks set to overshadow broadly positive performance over the quarter. Moreover, analyst questions for the most part attempt to glean from bank executives what could possibly be on the horizon from the market turmoil, such as JPMorgan CEO Jamie Dimon forecasting economic turbulence, and the bank reinforcing this caution with increasing provisions for loan losses from $3bn, up from $1.9bn over the quarter.
In another sign of the uncertain outlook, Deutsche Bank raised provisions to €471 million, 16% higher than anticipated, and signalled their preparedness for potential impacts of US tariffs on vulnerable clients by raising provisions by ~€100 million. Deutsche Bank's CFO, James von Moltke, cautioned that while he expected provisions for credit losses to remain within the guided range of €350 million to €400 million per quarter, tariff developments and broader geopolitical risks could cause swings in the €100 million figure. Also increasing provisions were HSBC, reporting expected credit losses by $202 million to $876 million in Q1, projecting a "low single-digit percentage" impact on revenues and an additional $500 million in incremental bad loan provisions in a scenario with "significantly higher tariffs".
With results largely positive for most banks reporting thus far, this could arguably be the best earnings banks may see this year, which given the uncertainty amidst the broader reconfiguring in trade, and geopolitical tensions, could be less positive in the coming months.
FCA and PRA Business Plans for 2025/ 26 published
As is customary for the end of the financial year, the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) have published their respective strategic and business plans, summarised below
FCA annual work programme 2025/26
The FCA's annual work programme for 2025/26 emphasizes becoming a smarter regulator by enhancing efficiency in data collection and digitizing processes. Initiatives such as the rollout of My FCA for unified access and "flexi collections" in RegData streamline submissions. These improvements aim to reduce the regulatory burden and expedite the authorisation process for quicker application assessments
Supporting growth entails boosting the UK's financial sector through competitive and innovative initiatives like reforming capital requirements and collaborating on AI advancement barriers. Efforts to simplify conduct requirements in commercial insurance and pension reforms are integral. Open banking initiatives and streamlined data processes further enhance market competitiveness
Helping consumers navigate their financial lives focuses on improving consumer resilience with regulated credit products like Buy Now Pay Later. The FCA is refining rules to ensure prudent use and encouraging industry innovation for consumer protection against financial shocks. Collaborative stakeholder efforts aim to develop policy frameworks that reinforce consumer financial stability
Fighting financial crime aims to reduce payment fraud and enhance market integrity by developing a data-driven detection system. The FCA facilitates cross-organizational data sharing to disrupt financial crime efficiently and narrow down exploitation gaps. Continual framework modernization seeks to safeguard investments and uphold consumer interests
Here's a high-level summary of the PRA's section on Banking, in its Business Plan for 2025/26:
Implementing the Basel 3.1 Standards
The PRA is working to finalize policy and rules for the Basel 3.1 standards that are yet to be implemented in the UK. Near-final rules were published in 2024, addressing competitiveness and growth alongside international standards. Significant adjustments were made to lower capital requirements to support lending to SMEs and infrastructure projects, without increasing overall capital requirements. The implementation date has been delayed to January 2027 to align with US plans, ensuring a full rollout by 2030.
Bank Stress Testing
Stress testing remains a crucial tool for the PRA to evaluate the resilience of individual banks and the overall banking system against hypothetical adverse scenarios. The PRA and the Bank of England conduct these stress tests to fulfill both microprudential and macroprudential objectives, employing methods such as full-fledged Bank Capital Stress Tests. In 2025, a Bank Capital Stress Test will be carried out, focusing on systemic UK banks to assess risks related to economic cycles. This will inform the setting of capital buffers needed to fortify the banking system
Securitisation
In an effort to streamline the banking rules, many components of the UK Securitisation Regulation were transferred to the FCA and PRA rulebooks. The PRA plans a consultation in the latter half of 2025 aimed at enhancing the securitisation framework. This includes amending the securitisation standardised approach and adjusting capital treatments for residential mortgages, enhancing the scalability of financial markets.
Internal Ratings-Based (IRB) Models & Model Risk, Liquidity, and Credit Risk Management
Over the past decade, banks have become increasingly reliant on models and scenario analyses for future risk assessment. The PRA continues to work with financial institutions under the IRB approach, refining models and promoting the adoption of hybrid strategies for mortgage modelling. The focus in 2025/26 will remain on implementing SS1/23, encouraging banks to improve model risk management as an essential risk discipline. The PRA will ensure compliance with liquidity and funding standards, particularly following the liquidity crises of March 2023.
Future of Payments
The PRA contributes to innovation in money and payments by monitoring advancements in deposits and stablecoins. In 2025/26, the PRA aims to implement the BCBS standard on banks' cryptoasset exposures. Engagement with international bodies will continue to assess digital money and cryptoasset market developments
Future Banking Data (FBD)
The Future Banking Data project integrates the Banking Data Review and Transforming Data Collection efforts to simplify banking regulatory reporting. The initiative focuses on cost reduction and improving data relevance, quality, and timeliness, enhancing regulatory efficiency
Bank of England joins the stress testing dots
Risk Magazine, 29th April
The Bank of England (BoE) is advancing its stress-testing framework by integrating system-wide stress tests with traditional firm-level assessments. This initiative aims to achieve a comprehensive understanding of risks and the interconnectedness within the financial system, acting as a unified regulatory approach. Following the successful completion of the BoE's first system-wide exploratory scenario stress-testing exercise, which garnered positive feedback from both industry participants and regulators, the initiative seeks to connect system-wide assessments with specific sector tests concerning banks, insurers, and clearing houses, as stated by senior BoE official Nathanaël Benjamin.
Traditionally, the BoE has employed sector-specific stress tests, focusing on how bank segments respond to adverse conditions such as credit losses and liquidity pressures. With the creation of sectoral and system-wide frameworks, efforts are now directed at ensuring these approaches inform and enhance each other. Benjamin highlighted the disconnect between system-wide exploratory scenarios and traditional stress testing systems. In particular, traditional tests evaluate the resilience of individual institutions, whereas exploratory scenarios assess overall market stability, irrespective of individual player failures.
For future preparedness, the BoE plans to continue investing in system-wide stress evaluations to monitor emerging vulnerabilities within less understood areas of finance. Such proactive strategies are intended to uncover overlooked risks. Benjamin emphasized that these stress testing exercises serve as crucial tools for illustrating potential scenarios and preparing market participants for future challenges. By sharing insights gained from these tests with the public and institutions alike, the BoE aims to enhance overall market preparation and readiness.
Moreover, the European Central Bank (ECB) is expanding its system-wide stress models to include central counterparties (CCPs), reflecting a broader regulatory trend aiming to fortify stress testing frameworks by covering a wider range of financial institutions. The ECB's move aligns with increasing recognition of the interconnectedness in the financial systems, necessitating comprehensive assessments that take systemic risks into account. This initiative is part of an endeavor to improve financial system robustness against external shocks.
In summary, the integration of system-wide and individual stress testing frameworks by both the BoE and ECB signifies a progression in regulatory practices focusing on financial stability. Collaboration between varied testing frameworks hopes to yield a more resilient financial system capable of withstanding economic shocks. Transparency and information sharing will be crucial in ensuring preparedness among market participants as both institutions pursue these regulatory strategies. This endeavor reflects a commitment to proactive measures against potential financial sector vulnerabilities.