Thirteen years ago, although it may seem like only yesterday for many, the financial system across the globe imploded. Major casualties included the Icelandic Banks, Bear Stearns, Lehman Brothers, and Northern Rock, with the governments stepping in to support those institutions that were once deemed “too big to fail”.
The Coronavirus pandemic has placed enormous pressure on the financial system, with related credit losses for UK Banks expected to be “somewhat lower than £80 billion” according to the Bank of England. This article delves into why the UK banking system was well prepared to deal with the pressure and how you can best protect your cash deposits in light of the current economic climate.
The UK financial system went from disaster, to recovery, to forgiveness… and now to unprecedented pressure to support individuals and businesses in the economic fight against Coronavirus. The banking and finance industry has offered millions of customers mortgage and credit card repayment holidays, lent over £75billion in Covid-related finance, whilst simultaneously managing volatile financial markets and historically low (and possibly negative) interest rates. This has all come at a cost – in terms of credit losses on the balance sheet and reduced profitability.
What lessons were learned from 2008 to ensure the Banks and Building Societies are well equipped to withstand the ongoing financial and economic turbulence?
“Never again” was the regulatory battle cry after the fallout from the financial crisis of 2008. Therefore, Global and Local Regulators stepped in to not only make the financial system safer but to also make sure taxpayers were not on the hook to bailout banks again should an institution get into difficulty.
Within this, four main areas of reform have occurred to better protect our financial system:
The Financial Services Authority (FSA) was abolished, and two new Regulatory Bodies created – the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA). The FCA remains an independent body with the responsibility to regulate the conduct of financial services firms, to ensure “financial markets need to be honest, fair and effective so that consumers get a fair deal”. The PRA is a body of the Bank of England with the trusted role of the supervision of Banks and Building Societies in the UK to ensure financial stability.
There is also the additional oversight from the Financial Policy Committee – tasked by Parliament to monitor the risks in financial services that could cause issues in the wider economy.
Banks have worked hard to ensure they can withstand much larger shocks (and therefore losses) without getting into difficulty:
Here in the UK, Banks have raised over £130bn of true loss absorbing capital, with an average ratio of capital to RWAs having gone from 4.5% to 14.3%
To protect against a systemic bank failure, there are three main lines of defence:
Historical stress tests showed Banks could withstand substantial credit losses which likely would have wiped out those Banks in the financial crisis, primarily due to the increased capital buffers now held.
The FSCS scheme has increased to £85k from £32k, with temporary options for short-term balances of up to £1million (such as inheritance or property sale).
To ensure financial institutions maintain enough liquidity to withstand 30 days of funding difficulties, including savers withdrawing their deposits, UK Banks now hold over £700billion in highly liquid assets.