HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks. This follows an independent ring-fencing regime review, which concluded that the resolution regime offers a more comprehensive solution to addressing the problems of "too big to fail" and recommended that the government should consider these practicalities.
This Call for Evidence represents the first stage of the government response to this recommendation. It seeks views on the ongoing benefits that ring-fencing provides to financial stability not found elsewhere in the regulatory framework and on the steps that could be taken to better align the ring-fencing and resolution regimes without losing financial stability benefits. The Call for Evidence invites respondents to consider a wide range of options for the longer-term future of ring-fencing. The government is proposing to use the below criteria and welcomes views of stakeholders on their appropriateness:
- Impact on financial stability. On criteria revolves around assessment of the impact on the ability of the Bank of England, Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) to promote their objectives, including to ensure the continuity of critical economic functions. This would include the clarity of supervisors’ understanding of firms’ operations and thus their ability to identify and manage risks to financial stability at an early stage as well as the likelihood of public funds being required to be deployed in support of a failed bank.
- Impact on firms. The next criteria entails examination of the costs each option impose on, or alleviate for, firms. Would firms be likely to materially change existing organizational structures? Would some options provide more or less regulatory certainty? It should be noted that the use of existing regulatory powers to replicate identified material benefits of ring-fencing may impose new and significant costs on firms and would need to be carefully considered. The government intends to draw on responses to Q3 in considering this impact.
- Impact on UK competitiveness and growth. Another criteria involves understanding the effect of each option on the attractiveness of the UK relative to other jurisdictions as a financial services hub and the ability of firms to support economic growth in the UK.
- Impact on competition. The extent to which each option diminishes or strengthens the ability of individual firms to compete with each other in the interest of UK consumers should also be considered.
Once this Call for Evidence has closed, the government, working with BoE and PRA through the Ring-Fencing Taskforce, will undertake detailed analysis of the received responses. This analysis will serve to inform the development of an initial policy position regarding the long-term future of the ring-fencing regime. The government will then issue its response to the Call for Evidence and set out next steps.
Related Link: Consultation on Aligning Ring-Fencing and Resolution Regimes
Keywords: Europe, UK, Banking, Resolution Framework, Ring-Fencing, Basel, Too Big to Fail, PRA, HM Treasury
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