Sapienza Università di Roma

Sapienza Università di Roma International Banking Lecture Thirteen UK Banking Prof. G. Vento

Agenda • Introduction to Banking in UK • Structure of the Banking and Financial System in UK • Key issues of UK Banking Industry • Banking Regulation in UK • UK Banking after the crisis Internaional Banking - Prof. G. Vento

1. UK Financial Reforms • In 1986 the City underwent a series of financial reforms to change the structure of the financial sector and encourage greater competition • The Financial Services Act was the culmination of a number of radical reforms of the UK financial system (Big Bang) • The main objective of the act was the protection of investors and the increase of competitiveness Internaional Banking - Prof. G. Vento

1. The Financial Services Act (1986) • Three prudential regulators: • Bank of England for banks • Building Societies Commission for BS • Department of Trade and Industry for insurance • Self-regulation was introduced for financial firms - self-regulatory organisations reported to the Securities and Investment Board, which was an umbrella organisation - self-regulatory bodies were thought to be the best judges of the standards and rules of conduct for their members because they have more information and knowledge about the operations of the financial business in question - however, self-regulation may encourage collusive behaviour among firms Internaional Banking - Prof. G. Vento

1. The key 1987 amendments to the Banking Act (1979) • Exposure rules. The Bank of England was to be informed if the exposure of any single borrower exceeded 10% of the bank’s capital, and was to be consulted if a loan to a single borrower exceeded 25% of its capital • Any investors with more than 5% of a bank’s shares must declare themselves • The purchase of more than 15% of a UK bank by a foreign bank may be blocked by the authorities • A Board of Bank Supervision was established Internaional Banking - Prof. G. Vento

1. The 1998 Banking Act • The 1998 banking act transferred the Bank of England’s supervisory and related powers to the newly created Financial Services Authority • The FSA took over responsibility for the authorisation and, where applicable, the prudential regulation, and the supervision of clearing and settlements and financial markets Internaional Banking - Prof. G. Vento

1. The Financial Services and Markets Act (2000) • According to this act FSA’s goals are to: • Maintain confidence in the UK financial system • Educate the public (with special reference to the risks associated with different forms of investing) • Protect consumers but encourage them to take responsibility for their own financial decisions • Reduce financial crime • The FSA is also obliged to be cost effective Internaional Banking - Prof. G. Vento

1. The FSA’s Risk Based Approach to Regulation • As supervisor for all financial institutions, the FSA is trying to move away from specific rules for each of the different types of financial institutions • The RTO Approach (risk to our objectives) involves computing a score for each firm supervised by the FSA. • The score shows the probability of the firm having an impact on the ability of the FSA to meet its statutory objectives • The score is obtained from a simple equation: Impact Score = Impact of the problem X Probability of the problem arising • A firm’s score determine how closely the FSA monitors it Internaional Banking - Prof. G. Vento

1. The Bank of England and Financial Stability • Given that a central bank is always involved in the preservation of financial stability, there is a Memorandum of Understanding between the Treasury, the Bank of England and the FSA • These organisations are jointly responsible for financial stability, including the reduction of systemic risk and undertaking official operations to prevent contagion • A tripartite standing committee was established Internaional Banking - Prof. G. Vento

2. A single national regulator? • UK, Sweden, Germany and other countries have single regulators for all financial firms • Is there a superior regulatory model? • The growth of financial conglomerates favours a single regulator; functional regulation may leave gaps; economies of scale and scope in collecting information; more effective system of cooperation and coordination; lower costs • There are arguments against a single regulator: too large and inefficient, specialisation, etc. Internaional Banking - Prof. G. Vento

3. Performance of UK Banks • UK banks have been among Europe’s best-performing financial firms • Cost-income ratio is around 60% • ROE in 2004: 26.4% Internaional Banking - Prof. G. Vento

4. Banking Act (2009) • The Banking Act provides a permanent set of tools that allows the tripartite authorities to resolve a distressed bank or building society in an orderly way. These powers will help reduce the impact of bank failure on financial stability and bank customers. • The Act will increase the responsibilities, powers and role of the Bank: • creating a new Special Resolution Regime (SRR) for dealing with distressed banks; • giving the Bank a statutory financial stability objective and with it creating a Financial Stability Committee to advise on financial system matters; • formalising the Bank's payment system oversight role; • creating a new framework for issuance of Scottish and Northern Ireland banknotes to be overseen by the Bank. Internaional Banking - Prof. G. Vento

4. Banking Act (2009): Special Resolution Regime • The Banking Act 2009 creates a Special Resolution Regime (SRR) which gives the Tripartite authorities a permanent framework providing tools for dealing with distressed banks and building societies. And it gives the Bank of England a new role in selecting from the statutory resolution tools. The SRR powers came into force on 21 February 2009 following the expiry of the emergency legislation in the Banking (Special Provisions) Act. • The SRR powers allow the authorities to: • transfer all or part of a bank to a private sector purchaser; • transfer all or part of a bank to a bridge bank - a subsidiary of the Bank of England – pending a future sale; • place a bank into temporary public ownership (the Treasury's decision) ; • apply to put a bank into the Bank Insolvency Procedure (BIP) which is designed to allow for rapid payments to Financial Services Compensation Scheme (FSCS) insured depositors; • apply for the use of the Bank Administration Procedure (BAP) to deal with a part of a bank that is not transferred and is instead put into administration. Internaional Banking - Prof. G. Vento

4. Banking Act (2009): Special Resolution Regime • The Banking Act creates clearly-defined roles for operation of the SRR. The Financial Services Authority (FSA), in consultation with the Bank and the Treasury, makes the decision to put a bank into the SRR. HM Treasury would decide whether to put a bank into temporary public ownership, and otherwise, the Bank of England, in consultation with the other authorities decides which of the tools to use. The FSCS has a role in relation to depositors covered by its depositor compensation scheme. • The Act sets out five key objectives in choosing which resolution tools to use: • to protect and enhance the stability of the financial systems of the UK; • to protect and enhance public confidence in the stability of the banking systems of the UK; • to protect depositors; • to protect public funds; • to avoid interfering with property rights in contravention with the Human Rights Act 1998. Internaional Banking - Prof. G. Vento

4. Risk Reduction Initiatives • The Bank - often in conjunction with the FSA, HM Treasury and international authorities - takes actions to change the environment in which financial intermediaries operate to maintain and improve the resilience of the financial system. • These actions may involve changes to financial infrastructure. For example, the Bank introduced a Real Time Gross Settlement System in 1996 which removed the need for members of CHAPS, the high value payment system, to be exposed to one another during the business day as a result of payments transactions. Alternatively, the Bank may seek to influence the design of prudential standards for intermediaries. • For example, between 1999 and 2005 the Bank played a prominent role in the design of Basel 2. Internaional Banking - Prof. G. Vento

4. Risk Reduction Initiatives • Some current structural initiatives in which the Bank is engaged are: • Liquidity standards • Solvency standards • Payment system liquidity • Payment system interdependencies • Payment system research • Linkages between firms • Responding to innovations in payment systems Internaional Banking - Prof. G. Vento

4. Payment System Oversight • Payment and settlement systems are vitally important to the smooth functioning of the economy. • For example, they allow financial institutions to settle financial market transactions, businesses to receive payments for goods and services, and the general public to make purchases and receive their salaries. In 2008, the value passing through UK payment systems was around £200 trillion, about 140 times UK annual gross domestic product. Internaional Banking - Prof. G. Vento

5. UK Economy after the crisis • The budget that the Chancellor of the Exchequer presented in March provides for a progressive reduction in public sector net borrowing. • This, according to the measure that excludes the temporary effects of financial interventions, would decline from 11.8 per cent of GDP in the fiscal year 2009-10 to 11.1 per cent in 2010-11 and to 5.2 per cent in 2013-14. • The total adjustment, equal to 6.6 percentage points, would consist of a 1.3 point reduction in the cyclical component of the deficit and a 5.3 point reduction in the structural component. Internaional Banking - Prof. G. Vento

Next Lecture : Basel III Internaional Banking - Prof. G. Vento

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