Banking in Financial Services UK
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A perfect storm
In the wake of the global financial crisis, UK banks pulled back from lending, owing to higher regulatory capital requirements and greater regulatory and shareholder scrutiny of their business models. They have adopted more risk-averse lending strategies in this environment, with more stringent reviews of the creditworthiness of borrowers.
Despite the many years that have passed since the global financial crisis, its causes and consequences continue to demand attention from industry and policymakers alike.
The Basel Committee on Banking Supervision (BCBS) published finalised revisions to the standards for assessment of Interest Rate Risk in the Banking Book (IRRBB) on 21 April 2016.
In recent papers1, the Basel Committee (BCBS) has proposed a number of changes to the scope and use of internal modelled approaches. Taken together, they represent a tectonic shift in banks’ ability to use internal models for regulatory capital purposes:
Culture in financial services firms has moved towards the top of the agenda for regulators, investors and consumers in the wake of excessive risk-taking by some firms in the run-up to the financial crisis and a string of misconduct scandals. Despite this, there can be a tendency on the part of some in the industry to see culture as “someone else’s problem”. A Deloitte survey on culture in banking carried out in 2013 found that 65% of senior bankers believed there were significant cultural failings across the industry, while only 33% believed the same of their own bank.
Cooling the buy-to-let spending spree | PRA proposes higher standards and capital charges for buy-to-let mortgage lending
The PRA published a Consultation Paper and draft Supervisory Statement on 29 March on more strict standards for buy-to-let lending. The proposals coincided with the FPC’s statement on macroprudential risks on the same day, which included concerns about the buy-to-let property market.
The FCA published its 2016-17 Business Plan on 5 April. The document is shorter and less detailed than in previous years, with only a brief Risk Outlook section, and makes limited announcements of new work. This may reflect the fact that the new CEO, Andrew Bailey, will not join the FCA until July, although as a member of the FCA Board, he will already have had an opportunity to influence the Plan. Like last year, the FCA has continued with its magic number of seven priority areas, rolling over five areas and prioritising two new areas – wholesale markets and the provision of advice.
The Senior Managers and Certification Regimes (“SMR”) and new Conduct Rule requirements are high on the agenda for many of our clients’ Audit Committees following their landing earlier this year. The changes, impacting banks, building societies, credit unions and designated investment firms, are designed to improve professional standards and culture. They have led to a flurry of activity across the sector in changing and implementing policies and processes to enable compliance.
When the EU launched the Banking Union, the ultimate objective of the project was to be able to share risks between countries, rather than retain them at the national level. It is an aspiration that faces many complex political challenges, including the trade-off necessarily made by countries involved between risk sharing and risk reduction. The current EU debate on European deposit insurance, the so-called third pillar of the Banking Union, and the sovereign exposures of banks, reflects precisely such a compromise.