Though nearly seven years have passed since Lehman Brothers collapsed, precipitating carnage in the markets, bank regulatory bodies are still nowhere near being able to absorb the huge costs associated with a bank failure without impacting on the tax payer, according to a statement from the Bank of England.
The Lehman’s disaster led to the creation of new laws, designed to let a bank go under without damaging the economy in any significant way, or requiring tax payer’s cash.
Mark Carney, while acknowledging that systems designed to safeguard the taxpayer have been implemented, says there is still no guarantee that these would be enough to protect them, in the event of the catastrophic collapse of one of the main UK banks . He went on to state that the UK will only draw close to a real solution, once additional regulations come into effect in 2020.
From 2019, UK banks will be required to protect their retail business with increased capital. From 2020, they will be under an obligation to keep extra bonds, that could be sold to cover costs during a crisis.
Carney believes that the current set-up is skewed in favour of the big banks. This is because they benefit more than their more diminutive rivals, in that both the markets and the credit rating companies believe that, in the event of a crisis, the government would step in to bail them out.
The five largest banks in the UK have all undergone resiliency testing on a voluntary basis, as per the Bank of England standard. Ideally, the Bank would like a further thirty five financial providers to submit to this test, and they expressed the opinion that if such firms displayed a reluctance to participate, the process could be made mandatory.