Britain has given its banks three months to show how they plan to protect their retail customers from riskier parts of their operations.
The Bank of England is forcing lenders to set up a boundary around their high street operations in an effort to protect taxpayers from any repetition of the multi-billion pound bailouts of investment banking operations that occurred during the financial crisis.
The changes, which will come into effect by 2019, mean that banks must submit preliminary plans by Jan. 6, 2015, the Bank of England said on Monday.
But it did not clarify a point that banks have been worrying about – whether they need to hold more capital in the ring-fenced domestic bank, or whether leverage ratios will be different. Those details will come later, it said.
The BoE, whose Prudential Regulation Authority arm regulates banks and insurers, also published consultation papers for other safeguards that are stricter than European Union rules in some cases.
It is also proposing that if a bank goes bust, its accounts should be transferred to another lender within a day so that customers can continue to withdraw their money and use their cards without interruption instead of having to wait for compensation. The change is expected sometime in 2016.
The aim is to prevent a repeat of the chaos seen when Northern Rock hit trouble in 2007 at the start of a global financial crisis, triggering the first run on a British bank in over a century as customers queued to withdraw their money.
The BoE’s proposals move towards the U.S. model for speedy resolutions of troubled banks, and go further than European Union rules that give customers an automatic right to have all their money up to 85,000 pounds refunded within seven working days from January 2024.
The BoE also said it would protect depositors for up to 1 million pounds if they temporarily have higher savings, such as if they have extra cash while they are moving house or get compensation for a personal injury. Savers would be covered for the extra cash for six months.
And it said holders of insurance policies for annuities, protection against accidental death or injury, and incapacity and professional indemnity should receive 100 percent compensation from July 2015, up from 90 percent now.
This follows the case of Equitable Life, an insurer that nearly went bust over a decade ago but has taken years to resolve compensation payouts. The Association of British Insurers had no comment.
Britain’s government wants retail banking operations separated so they can survive any problems in another part of a bank, and allow any bank that hits trouble to be dismantled more easily. Other countries, including the United States and Singapore, are also attempting to better shield domestic units.
Britain’s lenders have been working on restructuring since the plans were set out three years ago. But they say they need more clarity from the regulator on what is to be included in the units they are to ring-fence, particularly how some services like derivatives and hedging products are to be provided to companies.
“Given that several of the major banks have been engaged in planning for the ring-fence for some time now, in broad terms this should be achievable, but the banks will have to make the transition from exploring options to making decisions,” said Clifford Smout, a partner at consultancy Deloitte.
“Given the potential scale of change required by ring-fencing, plans cannot be ‘preliminary’ for too much longer.”
Banks will need to detail the legal and operating structure of their planned ring-fenced banks, including balance sheets and profit and loss statements.
The BoE also said no more than a third of the protected bank’s board can be current employees or directors of any other part of the group, and the chairman and chief executive of the unit may not be an executive of the separate investment banking operations.
Pay policy at the ring-fenced banks should be consistent with sound risk-management and long-term interests of the domestic retail bank, and distinct from the group as a whole.
Banks face a multi-billion pound bill to set up the UK units and the cost of running them with higher capital standards and separate operations may cost the industry between 1.7 billion and 4.4 billion pounds a year, the UK Treasury has estimated.
The BoE estimated there will be a one-off cost of up to 390 million pounds for the industry to implement the new safeguards on accounts, with a total annual cost of up to 50 million.
(Additional reporting by Matt Scuffham; Editing by Sophie Walker and Anna Willard)
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