Last month, CMS partners Emma Clark, and Chris Glennie joined Insignis Cash CEO, Giles Hutson, to discuss the UK banking sector and the importance of bank diversification.
We want to share with you the key takeaways from the webinar.
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- The UK banking system has improved regulation and capitalisation over the past 15 years, with the sector maintaining an average Common Equity Tier One ratio currently of 15.6%. UK banks also diversified their funding back to have less exposure to wholesale finance than in 2008.
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- The combination of ring-fencing and resolution regimes in the UK provide a comprehensive framework for dealing with financial institution failures and protecting depositors, investors, and the broader economy from the impact of such failures.
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- Critics argue that the expansive resolution regime, which includes structures such as bail-in, has made ring-fencing unnecessary and that all the emphasis should be placed on the resolution regime and disclosure framework. However, the Bank of England has stated that resolution and ring-fencing should be viewed as complementary rather than alternatives.
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- An increased focus on regulation is expected. The risks of deregulation and removing ring-fencing rules on UK banks could lead to bubbles and excessive risk-taking. The current regulatory regime imposes a significant compliance burden on banks, and some flexibility is needed. The government is expected to introduce more flexibility in the ring-fencing regime, and there is an opportunity to improve how the two regimes dovetail.
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- In the US, the failure of regulation in smaller banks and the risk associated with their lending portfolios is a significant issue. With over 4,000 banks in the US, a long tail of small banks with assets of under $250 billion accounts for 50% of all banking assets, posing a risk of contagion. Banks in the US place significant excess liquidity into the bond markets, which can create risks when rates rise, as seen with the problems around SVB. Rising rates can also impact banks’ capital buffers, leading to a combination of interest rates and capital risk. These themes are common but vary in significance across the US and the rest of the world.
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- Central banks have the tools to contain contagion. None of the 40 banks on the Insignis Cash panel had their credit ratings changed since the SVB story began, and the Bank of England has responded rationally to the situation. The UK contagion risk is considered low for specific reasons related to credit ratings, industries, and central banks.
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- Although the ring-fencing regime has reduced the risk of financial instability, there are still risks to considered. Treasurers and individuals should consider factors such as the liquidity portfolio, exposure to higher rates, and FSCS eligibility when dealing with banks.
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- It is essential to have an updated treasury counterparty policy that considers bank diversification, and counterparty risk. It is also important to demonstrate this policy to stakeholders.
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- The UK deposit market is worth over £2.4 trillion, with FSCS eligibility offering significant benefits to individuals, SMEs and charities. The two sources of credit risk management are utilising FSCS protection when possible and then bank diversification.
Bank diversification is a win-win for everyone, as it reduces risk and increases income.
If you have any questions or would like to discuss how Insignis Cash can support your or your Clients’ cash diversification efforts, please do not hesitate to get in touch.