In a speech last night (16 October), Sam Woods, deputy governor of the BoE and head of the Prudential Regulation Authority, said the central bank was considering new rules that would see the Treasury paying out deposits from small banks in the event of a collapse.
While large banks can maintain depositor continuity through the BoE writing down the value of the long-term debt held by the bank and then recapitalising and restructuring it, small banks do not currently have access to this option, Woods said.
Instead, the current alternative to keep a failed firm open would be having the Bank of England take over directly, leaving the risk that losses would be passed on to the taxpayer, he explained.
Moody’s downgrades several regional US banks
“We are therefore exploring with HMT options to maintain continuity of access to deposits in resolution for smaller firms, in a way that minimises the risk to public funds,” Woods said at the annual Mansion House dinner. “I have no doubt that there will be a lively debate as we bring these proposals forward.”
While Woods stressed the importance of adding additional tools to the regulatory framework, he said he was still confident in the stability of the financial system, following reforms made since the Global Financial Crisis, including the tripling of banks’ capital levels.
“We now estimate that the UK banking system holds enough capital to survive a global recession worse than the 2008 crisis,” Woods said.
Other changes proposed by Wood in his speech included altering the regulation of foreign bank branches, such as the ones applied to SVB UK.
Group of Credit Suisse bondholders plan lawsuit against Swiss government
He explained that SVB UK had been required to subsidiarise after ten years as a branch, which proved “extremely useful” on its collapse, allowing the BoE to quickly intervene.
However, Woods emphasised that “this is not about fundamental reform, but about whether there are any targeted areas for improvement”, adding that almost all branch businesses would be “unaffected”.
Simplifying the regulatory regime for small domestically-focused banks was another area of focus, with Woods stating that the PRA would be bringing forward some material simplifications of the capital regime for these firms, though he stressed that changes would not be made that weakened resilience.
Additionally, Woods noted the “clear advantages” of solvent wind-downs over collapsing in insolvency meant that the PRA was also consulting on improving ‘ease of exit’ for small banks, mainly to improve the quality of planning at firms.
However, he added: “The process needs to be carefully planned, not least to avoid triggering a panic that flips them into an insolvent exit.”
Furthermore, reforms simply targeted at financial measures may be short-sighted, as Woods stressed that Credit Suisse had not collapsed due to sudden expectations of insolvency, but due to a general lack of confidence in the ability of the bank to make profits.
This pointed to the “importance of non-financial regulation and supervision”, Woods said, covering areas such as governance and operational resilience.
The deputy governor also argued that regulators must consider the impact that failing businesses may have on an entire sector, especially with the PRA’s new secondary objective by parliament to facilitate the UK’s economic growth and competitiveness.
“As supervisors, we need to ask whether a firm has a viable business model,” he explained.
