Bank bosses could be ejected by regulators if they fail to bullet-proof their companies against economic shocks.
The new powers form part of the Bank of England’s ground-breaking plans to stress test Britain’s financial services industry every year. In a discussion paper ahead of the new regime’s launch in January, the Bank revealed it would consider “changing banks’ management” if capital planning or governance fell short of required standards.
The announcement came as it emerged that senior bankers face up to seven years in jail if their mismanagement of the business led to its collapse, under a new “reckless misconduct” offence. The draft law was one of a series of amendments to the Banking Reform Bill that is expected to receive Royal Assent early next year.
The Treasury said: “Senior managers could be liable if they take a decision which leads to the failure of the bank, or fail to take steps available to them to prevent such a decision being taken.
“The offence will only apply to behaviour which falls far below the standard that could reasonably be expected of a person in that position – this is similar to the test for corporate manslaughter.”
The Chancellor pledged to introduce criminal penalties for reckless bankers in July in response to a landmark report by the Parliamentary Commission on Banking Standards.
But the scale of the jail term was only disclosed yesterday.It was one of 86 amendments to the Banking Reform Bill, which a Treasury spokesman described as “the biggest ever overhaul of the UK banking system”.
The amendments included the establishment of a more stringent approval regime for bankers, stronger regulatory powers to boost competition in the industry, and new laws to “bail in” bank creditors in the event of a lenders’ collapse to spare taxpayers the cost of another bail-out.
The Bank’s plans for an official stress-testing regime would be a watershed moment for the UK after years of informal tests since the crash of 2008. It would also draw Britain into line with the US, Sweden, Japan and Hong Kong.
However, the discussion paper suggested that UK banks would be expected to gold-plate their balance sheets compared with international peers.
“In practice, the level of capital that banks would need to maintain in order to survive in a stress scenario could be set above strict regulatory minima,” the Bank said.
“Requiring banks to remain above internationally agreed minima may be insufficient to mitigate risks to financial stability.” Under the proposals, the results of the tests would be announced on a bank-by-bank basis alongside lenders’ own plans to make good any shortfalls.
If extra capital was needed, banks could be forced to cancel dividends, cut bonuses, sell businesses or issue shares. Regulators could be more lenient on lenders that were able to fail without financial contagion, the Bank signalled.
“Individual banks’ idiosyncracies, such as their resolvability, suggest that required post-stress capital ratios are likely to vary across banks,” the paper said. Banking sources were sanguine about the prospect of tougher capital requirements than overseas rivals, saying that they had come to expect such demands from the central bank.
They also welcomed the transparency and clarity the formal tests would bring to what they claimed had been at times a “disorderly” unofficial process. The British Bankers’ Association said: “Individual banks already use stress tests as part of their capital planning, and it is important for the Bank of England and regulators to test the system as a whole.
“These new proposals should reinforce confidence in the financial system by letting regulators make judgements that balance systemic stability with the need to support growth.”
The Bank plans to launch the stress tests for the UK’s biggest eight banks next year and gradually move to system where it tests all but the smallest lenders, including the UK subsidiaries of overseas banks and eventually central counterparties.
The Bank said it planned to disclose the scenarios being tested and the outcomes, but is seeking feedback from the industry before confirming the framework. Stress scenarios could include a housing market crash, a recession, a spike in unemployment, or external shocks such as from the eurozone crisis.
It said the annual tests would help strengthen supervision of the banks, make it easier for Parliament to hold the regulator accountable, enhance confidence in the banking system and improve behaviour and risk management within the banks.
Banks have until January 10 to respond to the discussion paper. Separately, the Bank of England revealed plans to conduct a “deep analysis” of the threats to the economy posed by a potential housing bubble and review “the range of tools” it has to correct an overheating market.
The pledges were made two weeks ago amid mounting concerns that the Government’s Help-to-Buy subsidised mortgage scheme could stoke a housing bubble. The FPC said “it would need to be vigilant to potential emerging vulnerabilities in the financial system”.
It added that it was “important that the Committee should develop a deep analysis of the ways in which housing developments might affect financial stability”.
telegraph.co.uk
The new powers form part of the Bank of England’s ground-breaking plans to stress test Britain’s financial services industry every year. In a discussion paper ahead of the new regime’s launch in January, the Bank revealed it would consider “changing banks’ management” if capital planning or governance fell short of required standards.
The announcement came as it emerged that senior bankers face up to seven years in jail if their mismanagement of the business led to its collapse, under a new “reckless misconduct” offence. The draft law was one of a series of amendments to the Banking Reform Bill that is expected to receive Royal Assent early next year.
The Treasury said: “Senior managers could be liable if they take a decision which leads to the failure of the bank, or fail to take steps available to them to prevent such a decision being taken.
“The offence will only apply to behaviour which falls far below the standard that could reasonably be expected of a person in that position – this is similar to the test for corporate manslaughter.”
The Chancellor pledged to introduce criminal penalties for reckless bankers in July in response to a landmark report by the Parliamentary Commission on Banking Standards.
But the scale of the jail term was only disclosed yesterday.It was one of 86 amendments to the Banking Reform Bill, which a Treasury spokesman described as “the biggest ever overhaul of the UK banking system”.
The amendments included the establishment of a more stringent approval regime for bankers, stronger regulatory powers to boost competition in the industry, and new laws to “bail in” bank creditors in the event of a lenders’ collapse to spare taxpayers the cost of another bail-out.
The Bank’s plans for an official stress-testing regime would be a watershed moment for the UK after years of informal tests since the crash of 2008. It would also draw Britain into line with the US, Sweden, Japan and Hong Kong.
However, the discussion paper suggested that UK banks would be expected to gold-plate their balance sheets compared with international peers.
“In practice, the level of capital that banks would need to maintain in order to survive in a stress scenario could be set above strict regulatory minima,” the Bank said.
“Requiring banks to remain above internationally agreed minima may be insufficient to mitigate risks to financial stability.” Under the proposals, the results of the tests would be announced on a bank-by-bank basis alongside lenders’ own plans to make good any shortfalls.
If extra capital was needed, banks could be forced to cancel dividends, cut bonuses, sell businesses or issue shares. Regulators could be more lenient on lenders that were able to fail without financial contagion, the Bank signalled.
“Individual banks’ idiosyncracies, such as their resolvability, suggest that required post-stress capital ratios are likely to vary across banks,” the paper said. Banking sources were sanguine about the prospect of tougher capital requirements than overseas rivals, saying that they had come to expect such demands from the central bank.
They also welcomed the transparency and clarity the formal tests would bring to what they claimed had been at times a “disorderly” unofficial process. The British Bankers’ Association said: “Individual banks already use stress tests as part of their capital planning, and it is important for the Bank of England and regulators to test the system as a whole.
“These new proposals should reinforce confidence in the financial system by letting regulators make judgements that balance systemic stability with the need to support growth.”
The Bank plans to launch the stress tests for the UK’s biggest eight banks next year and gradually move to system where it tests all but the smallest lenders, including the UK subsidiaries of overseas banks and eventually central counterparties.
The Bank said it planned to disclose the scenarios being tested and the outcomes, but is seeking feedback from the industry before confirming the framework. Stress scenarios could include a housing market crash, a recession, a spike in unemployment, or external shocks such as from the eurozone crisis.
It said the annual tests would help strengthen supervision of the banks, make it easier for Parliament to hold the regulator accountable, enhance confidence in the banking system and improve behaviour and risk management within the banks.
Banks have until January 10 to respond to the discussion paper. Separately, the Bank of England revealed plans to conduct a “deep analysis” of the threats to the economy posed by a potential housing bubble and review “the range of tools” it has to correct an overheating market.
The pledges were made two weeks ago amid mounting concerns that the Government’s Help-to-Buy subsidised mortgage scheme could stoke a housing bubble. The FPC said “it would need to be vigilant to potential emerging vulnerabilities in the financial system”.
It added that it was “important that the Committee should develop a deep analysis of the ways in which housing developments might affect financial stability”.
telegraph.co.uk
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