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
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Internaional Banking - Prof. G. Vento
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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
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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
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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
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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
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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
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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
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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
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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.
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3. Performance of UK Banks
• UK banks have been among Europe’s bestperforming financial firms
• Cost-income ratio is around 60%
• ROE in 2004: 26.4%
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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.
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4. Banking Act (2009): Special Resolution
Regime
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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.
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4. Banking Act (2009): Special Resolution
Regime
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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.
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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.
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4. Risk Reduction Initiatives
• Some current structural initiatives in which the Bank is
engaged are:
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Liquidity standards
Solvency standards
Payment system liquidity
Payment system interdependencies
Payment system research
Linkages between firms
Responding to innovations in payment systems
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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.
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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.
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Next Lecture :
BASEL III
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