The FSA, HM Treasury and Bank of England have published a joint consultation paper entitled Financial stability and depositor protection: strengthening the framework (the Consultation Paper).
The Consultation Paper builds on the October 2007 Discussion Paper, Banking reform - protecting depositors. It also takes into account the House of Commons Treasury Select Committee report, The run on the Rock which was published on 26 January 2008. In light of the recent turbulence in global financial markets the Consultation Paper sets out proposals to address the following five key objectives:
- Strengthening the financial system. Due to the interconnectedness and complexity of the financial system, action is required in the UK and internationally, to strengthen its stability and resilience. This would include strengthened risk management by banks and improved functioning of securitisation markets.
- Reducing the likelihood of banks failing. The high costs for the wider economy and society if a bank gets into difficulty require that further steps be taken to reduce the likelihood of this happening. It remains a clear principle that those in charge of individual firms are primarily responsible for managing risk. The proposals seek to strengthen the regulatory and supervisory framework (including more formal oversight of payment systems) and make changes to the framework for provision and disclosure of liquidity assistance.
- Reducing the impact of failing banks. Proposals include the introduction of a “special resolution regime” within which there would be a range of tools to resolve a failing bank in a more orderly manner, including an accelerated method to transfer its business to a healthy bank, a “bridge bank”, deployment of a restructuring officer and a bespoke “bank insolvency procedure”.
- Effective compensation arrangements in which consumers have confidence. The proposals include a consultation on a potential increase of the compensation limit for deposits and making changes to enable the Financial Services Compensation Scheme to make payments within one week of a bank failing.
- Strengthening the Bank of England and improving coordination between authorities. The Government, the FSA and the Bank of England believe that the tripartite arrangements are appropriate for the UK, as endorsed by the Treasury Select Committee. However, they believe that important changes are required to the way that the arrangements work in practice. Proposals include a statutory basis for the Bank of England’s financial stability role and better governance arrangements within the Bank of England to support the new statutory obligation.
The deadline for comments on the Consultation Paper is 23 April 2008.
View Financial stability and depositor protection: strengthening the framework, (PDF 833KB), 30 January 2008