City braces for tighter regulation after banking turmoil

City bosses are bracing for tighter oversight in the wake of the most dramatic bank collapses since the financial crisis, even as the UK government doubles down on its vision for bolstering London’s competitiveness by rewriting its financial services rule book.

Chancellor Jeremy Hunt told the House of Lords last week that the government would push ahead with plans to reinvigorate the City through rule changes known as the Edinburgh reforms, widely seen as a regulatory easing.

“Sticking with the status quo is not necessarily the best thing to do to ensure financial stability,” Hunt said, the day after Credit Suisse’s shotgun marriage with UBS marked one of the world’s biggest bank failures in history.

“We should make sure that we get the right balance between stability and growth potential.”

The Edinburgh package includes overhauling London’s listing regime, liberalising what insurers can invest in, and reviewing some post-crisis regulations such as ringfencing measures — which forced separation of retail banking and trading — and rules to improve accountability and culture across City firms.

The Bank of England has separately promised a new “strong and simple” regime to deliver more “proportionate” regulation to banks with assets of less than £20bn.

A senior policy figure at one large bank said that the reforms’ impact could now be damped, even if the Treasury could not pull back from the Edinburgh programme because it was a “core feature” of the government’s goal of boosting UK productivity and growth.

“I suspect its ‘competitiveness’ agenda will now be more forcefully challenged by the regulators, who have some data points now to press for higher liquidity and even capital numbers.”

His point was echoed by David Postings, chief executive of bank trade association UK Finance, who said recent “turmoil” could “give regulators more confidence in terms of the discussions [with government]”, and another lobbyist who said he would be “amazed” if regulators did not capitalise on recent events to push back against any loosening of the rule book.

The BoE’s governor, Andrew Bailey, publicly warned the government in December not to forget the lessons of the financial crisis, and has pushed back particularly strongly on insurance capital reforms.

A policy chief at a second large bank said the promised reviews of ringfencing and accountability rules known as the senior managers regime were likely to be less enthusiastically pursued now. “They will be less aggressive on any roll back because in a time of crisis you don’t want to be seen to be lenient on banks.”

One senior UK insurance executive said the failure of Silicon Valley Bank — a midsize US lender to the tech industry — and Credit Suisse had triggered concerns that regulators could “reverse-ferret” over proposed loosening to EU insurance rules known as Solvency II. But they added policymakers had given no such signals, and the “idiosyncratic” and non-UK origins of the bank problems made it a remote possibility for now.

Meanwhile, British watchdogs are expected to become more cautious in their supervisory approach and in rule changes within their gift.

Under the banner “strong and simple”, UK banking supervisors have been promising a more “proportionate” regime for small and midsized lenders deemed not to pose a risk to the entire system.

The US undertook a similarly intentioned — though more sweeping — initiative from 2018 by exempting banks with less than $250bn in assets from global capital rules and resolution planning. The list of exempted lenders included SVB.

It was SVB’s implosion that sparked a global market panic that has already claimed Signature Bank and Credit Suisse, and imperilled a third US non-systemic lender, First Republic.

The UK’s strong and simple proposals “are still only at the consultation stage, so the [Prudential Regulation Authority] does have the flexibility to pause and take stock of how recent events may impact its proposals,” said Jake Ghanty, financial regulatory partner at Wedlake Bell, adding that the PRA might now take a “more cautious” approach.

Postings, a strong supporter of the regime, admits the climate for introducing it is “perhaps more challenging now”, though he continues to advocate for increasing the threshold at which banks should have to hold loss absorbing capital to £25bn from £15bn.

Tighter liquidity rules are another potential focus. “I wouldn’t be surprised if you start hearing more noise on whether liquidity coverage ratios or net stable funding ratios are appropriate,” said one UK bank executive, referring to two of the critical post-crisis rules for mitigating liquidity issues.

The second policy executive said recent turbulence could also prompt regulators to push for lenders to use subsidiaries rather than branches, since the resolution of SVB’s UK arm showed how much easier resolutions were to handle in a subsidiary, which is a separate legal entity subject to tighter oversight by host countries’ regulators.

The BoE and the Financial Conduct Authority declined to comment.

The government said: “We are continuing to deliver the Edinburgh Reforms, which recognise the foundations on which the UK’s success as a financial services hub is built: stability, high regulatory standards, agility, and openness.

“As the independent Bank of England has confirmed, the UK banking system remains safe, sound and well capitalised.”