Skyfall: British Banking After the Financial Crisis

Peter MathesonEconomic and Financial CounsellorThe British Embassy

UNCLASSIFIED

UK Financial Services Reform

• Architectural Reform• Structural Reform• European Reforms• LIBOR• Resolution• Growth and the

wider policy agenda

Key Facts• The UK’s trade surplus of $51 billion in 2011 was

more than triple that of the U.S. ($16 billion)• London was ranked first in a March 2013 survey

of international financial centers• 1,400 financial services firms in the UK are

majority foreign-owned• London has 251 foreign banks (more than any

other city)• Since 2005, 2.7 million people have created bank

accounts in the UK (for a total of 9.1 million people with bank accounts in the UK)

• 2 million people work across the UK in financial and related professional services, but more than two thirds of them are employed outside of London

Source: TheCityUK

Financial Centers in the UK

UK Financial Services

Source: PricewaterhouseCoopers/City of London Corporation

Bank Popularity: U.S. Polling Data

Pew Center for the People & the Press Political Survey, Feb 2012

Are banks and other financial institutions having a positive or negative effect on the way things are going in this country?

What are the problems policy is trying to address?

• The financial crisis of 2007 onwards

• The financial sector in the UK economy – as an employer and business

• The financial sector as a lender to the rest of the economy

Architectural Reform• The UK previously had a “tripartite system”• Financial Policy was made by three

institutions: HM Treasury, the Bank of England and the Financial Services Authority (FSA)

• Policy overlap and under-lap• New system key points:

▫Bank of England looks at the state of the financial system as a whole

▫Within the Bank, Prudential Regulatory Authority regulates individual banks and Financial Policy Committee tailors policies over the economic cycle

▫Outside the Bank, Financial Conduct Authority enforces good and lawful behaviour

Structural Reform• Independent

Commission on Banking

• Sir John Vickers• Ring fencing of retail

bank operations• Little cross over

between the two operations

• “Electrification”

Paul Volcker

Sir John Vickers

European Policy Issues

• UK a member of the Single Market

• Derivatives• Basel III• Bankers bonuses

and bonus caps• Financial

Transactions Tax

Resolution• The Banking Act 2009 created a Special Resolution Regime (SRR).

The Prudential Regulation Authority (PRA), in consultation with the Bank of England and the Treasury, makes the decision to put a bank into the SRR.

• The SRR powers allow the authorities to:▫ transfer a bank’s business to a private sector purchaser; ▫ transfer a bank’s business 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 insured depositors

• The Bank of England issued a white paper with the FDIC proposing strategies to resolve globally active, systemically important banks▫ “Top-down” resolution strategies that involve a single authority

apply its powers in a “single point of entry” at the parent company level

LIBOR

•The Wheatley Review•A clear case in favour of comprehensively reforming LIBOR, rather than replacing the benchmark•Transaction data should be explicitly used to support LIBOR submissions•Market participants should continue to play a significant role in the production and oversight of LIBOR•Making manipulation a criminal offense•Set the standards for benchmark reform globally

Growth and the Broader Agenda

• Financial stability is a pre-requisite for economic growth

• Promoting lending at the same time as tightening standards

• Boosting competition in the banking sector

Conclusion• The Financial Services Act 2012 gives effect to the commitment

in the Coalition Agreement to abolish the Financial Services Authority (FSA) and transfer its prudential supervisory powers to the Bank of England 

• Establishing a macro-prudential authority, the Financial Policy Committee (FPC) to monitor and respond to systemic risks 

• Transferring responsibility for prudential regulation to a focused new regulator, the Prudential Regulation Authority (PRA)

• Establishing the Financial Conduct Authority (FCA) to ensure that business across financial services and markets is conducted fairly and properly

• Bringing the LIBOR benchmark into regulation, delivering the recommendations of the Wheatley Review

• Implementing the Vickers Review recommendations• Implementing Basel III

CONTACT INFORMATION

Peter.Matheson@fco.gov.uk

RESOURCEShttp://www.thecityuk.com/research/our-work/reports-list/key-facts-about-uk-financial-and-professional-services/