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10 December 2012

The new UK and US “action plan“ for safer banking

Five questions answered.

By Heidi Vella

The UK and US have issued a joint paper outlining an action plan for flagging banks that hopes to protect the tax payer from costly financial bail outs.

Who exactly has issued this paper?

The Bank of England and America’s Federal Deposit Insurance Corporation.

What are the key points of this ‘action plan’?

Key points include, establishing a single key regulator that will take responsibility for overseeing the insolvency of a big international bank.

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Requiring big banks to hold enough capital and debt that could be converted into capital at the top of their corporate structures, in a hope that this capital and debt would absorb any losses the bank makes while its issues are resolved and the bank is made safe again.

They also request that banks continue with critical services, insulate foreign operations, sack reprehensible management and reduce parts of the bank that caused the problems in the first place.

What outcome is it hoped these key points will result in should there be another banking crisis?

That, for example, the Bank of England would not have to call on the Treasury  to put as much money into the Royal Bank of Scotland or an HBOS that was facing collapse, as happened in the most recent banking crisis, as the bank’s creditors would have to become shareholders.

The idea is that this would limit the cost to the tax payer and wider economy if another banking crisis should arise.

What banks in particular is this action plan aimed at?

Banks such as the UK’s Royal Bank of Scotland and Barclays and Citigroup and JP Morgan in the US.

What other consequences could occur from this action plan?

According to the BBC’s business editor this could result in: “the costs for banks of raising money would rise: as you will have deduced, the risks of investing in and lending to banks increases in proportion to the perceived reduction in the implicit insurance against failure they receive from the state.”

He adds that banks will: “have to make bigger returns to generate a profit. And, everything else being equal, that means they would feel obliged to charge their customers rather more for loans and for keeping money safe.”

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