The Bank of England has criticised the UK banks’ risk management system #

In a series of letters to the chief executives, the Bank of England expressed criticism over the UK banks’ risk management system after the collapse of multibillion-dollar Archegos Capital exposed the risk management weak spots. The collapse led to nearly £8 billion of trading losses.

BoE expresses discomfort with the exposure of traditional financial institutions to the hedge funds and other non-banking financial institutions. Despite policy makers being rather optimistic about the soaring inflation and flying up interest rates on the traditional banking system, officials are concerned that banks aren’t doing enough to mitigate the risks coming from other segments of financial markets.

BoE announced a landmark exercise aiming to identify potential risks.

“During 2022, the market reaction to Russia’s invasion of Ukraine, and volatility in the nickel and long-dated gilt markets, reinforced the importance of a robust risk culture and sound risk management practices at firms,” the letters read.

The letters accuse firms of unintentionally accruing exposures to counterparties without understanding the risks it brings up. The letters also called the underwriter’s ability to assess catastrophe risks “immature”, and offered the bank’s help in the risk management.