Why have UK banks been insulated from US panic? Regulation, regulation, regulation
Regional lenders in the US have been in the spotlight since the collapse of Silicon Valley Bank (SVB) with investors concerned they might be at risk from an avalanche of deposit flights.
Since the collapse of SVB and Signature, shares in the US KBW regional banks index have fallen over 10 per cent.
In the UK however, very little attention has been paid to challenger banks which have looked much more secure.
Bank CEOs exclusively told City AM they had seen few problems on either deposit flight or credit risk.
Why have the UK’s smaller banks avoided the problems faced in the US?
In short the answer is differing regulations. In 2018, Donald Trump cut regulations on mid-tier US banks such as SVB under pressure from the very organisations the regulations applied to.
The one-term president raised the threshold at which tighter capital requirements applied from $50bn to $250bn, arguing that those banks – because they were relatively small – would have little impact on financial stability.
The raised threshold meant banks like SVB were not subject to strict rules on liquidity coverage ratios and capital requirements under the global Basel framework, nor did all of them participate in regulators’ stress tests.
In the UK, the equivalent regulations come into force much lower, between £15bn and £25bn depending on the size of the bank.
Mid-tier banks also often hold liquidity coverage ratios much higher than the 100 per cent minimum set out in the Basel rules.
In a letter to the Treasury Committee, Andrew Bailey said: “The UK’s liquidity framework has been designed in line with international standards and applies to all UK banks and building societies”.
The Prudential Regulation Authority (PRA) also conducts regular stress tests on the banks too, ensuring they are able to survive in the event of a bank run. Banks that are too small to participate are required to conduct their own tests.
While there are plans to simplify regulations on smaller banks under the Strong and Simple framework, Bailey said “there is no intention that any such simplifications will weaken the regime for small banks”.