British banks have been given less than three months to put together an initial plan of how they would protect retail customers from any potential fall out from their riskier activities.
The Bank of England has published four papers outlining its plan to improve the financial stability and security of deposit takers, to avoid a repeat of the chaos caused when Northern Rock was hit by the financial crisis in 2007, leading to the first run on a British bank in more than a century.
Banks with core deposits of £25bn or more will be required to ring-fence their core activities from “activities associated with trading and financial interconnectedness” from January 1, 2019.
All institutions affected must have submitted a preliminary plan to the BoE's Prudential Regulation Authority (PRA) by December 31 this year.
The PRA is currently consulting on three areas of ring-fencing policy – the legal structure of banking groups; governance; and continuity of services and facilities. It is also looking at changes to enhance depositor and insurance policyholder protection.
Andrew Bailey, deputy governor of the Bank of England and chief executive of the PRA, said: “Improving the resilience and resolvability of firms has been at the heart of international and domestic reforms since the financial crisis.
“Ring-fencing will improve banks’ resilience, by protecting them from shocks, and facilitate orderly resolution – both of which are needed for a stable financial system.”
He added: “These proposals will allow customers to have continuous access to the money in their bank account – or receive payment from the FSCS if this is not possible. Additionally, the increase in FSCS limits for certain types of insurance will mean policyholders who may find it difficult to obtain alternative cover, or who are locked into a product, have greater protection if their insurer fails. ”
The changes include:
* New rules allowing customers to continuously access the deposits covered by the Financial Services Compensation Scheme if their deposit taker fails
* Additional FSCS coverage for deposits that are temporarily higher than the £85,000 compensation limit – ie house purchases or personal injury compensation – within seven working days.
* For insurance policyholders, the PRA is proposing to increase the limit from 90 per cent to 100 per cent of cover for annuities, pure protection, claims arising from death or incapacity and professional indemnity insurance.
The BoE did not confirm whether banks will have to hold more capital in ring-fenced domestic banks or whether leverage ratios will be different.