Early in the crisis, the PRA recognised that the significant change in the operating environment as a result of Covid-19, would cause some firms to experience a material change in risk profile. The UK market is particularly exposed to low interest rates which result in large increases in the risk margin for annuities. Recognising this, as well as the risks posed by the advent of Covid-19, the PRA invited firms to apply to recalculate their TMTP in light of significant changes in interest rates that occurred in March 2020. In any application for permission to recalculate  3  https://www.bankofengland.co.uk/prudential-regulation/letter/2020/letter-from-sam-woods-to-insurers-on-distribution-of-profits 3  All speeches are available online at www.bankofengland.co.uk/news/speeches  3  TMTP, the PRA expects firms to be able to demonstrate how the current environment has caused a material change in their own individual risk profile. The symmetric adjustment is explicitly aimed at mitigating undue pro-cyclical effects as a result of temporary movements in financial markets. It increases capital requirements when markets are buoyant relative to their historical average and reduces them when markets are relatively depressed. The chart plots the symmetric adjustment over time. As you can see from Chart 2, the symmetric adjustment was trending upward, while conditions were relatively benign and markets were rising. When the Covid-19 outbreak began, it decreased sharply. In this way, it led to insurers building capital buffers when markets were rising, and then allowed them to be released when markets fell.

Moreover, raising new private capital in this environment is a very tall order; while the option of public capital injection very costly for shareholders and tax payers. Therefore, it is imperative that banks need to be even more vigilant in managing not only their asset quality but also their internal capital, funding, expenditure including executive pay, and dividend policy. Looking at banks in the Asian region, such as Thailand, despite rapid development of capital market in recent years, the core banking businesses remain traditional; largely deposit taking and loan extension. Meanwhile, treasury operation remains relative small. Moreover, with the financial market predominantly bank-based rather than market-based, there tends to be less risk and complication arising from the originate-to-distribute models of securitisation. Nevertheless, in the past few years, banks have expanded business scope, operating as universal banks or financial conglomerate, with securities and insurance arms. Therefore, organisational structure and risk profile, of even the more traditional banks, have become much more complex. This, in turn, demands that bank’s risk management, Board’s oversight, and supervisory framework can match the increasing complexity and ensure adequacy of capital and risk management system on a consolidated basis. On market risk, some banks in Asia and Pacific countries have been exposed to the subprime related assets such as CDOs as well as assets of failed institutions. The losses so far have been limited to foreign assets and are addressed by private and government assistance. On hindsight, this crisis highlights the fact that it is easy to overestimate one’s risk management ability.