Ussher Discusses Reform Of UK Banking Sector

by Robin Pilgrim, LawAndTax-News.com, London

11 June 2008

Speaking on Tuesday at the British Bankers’ Association Conference in London, Economic Secretary to the UK Treasury, Kitty Ussher discussed planned reforms to the UK's banking sector.

Stressing the importance of the sector to the UK economy, Ms Ussher argued that:

"Without banks holding and moving money, through bank accounts and payment systems, our economy simply couldn’t function. So the importance of your sector to our economy goes way beyond the 1.1 million people employed in financial services, or the huge 10% of GDP they generate; it is uniquely crucial to the functioning of UK plc as a whole."

She went on to comment on the recent disruption in the financial markets, observing that "banks have been facing a number of challenges – and I know that this has been a difficult year for many of you".

She continued:

"I don’t want to spend a great deal of time going over what has happened since last summer – we’ve all been living through those events."

"But I will just say that throughout the last nine or ten months, we have worked hard to protect financial stability, and to support the financial services sector – because we know how important it is to our economy, not just here in London but across Britain."

"And I would like to take this opportunity to talk about how we’re responding to the disruption that we’re continuing to see in financial markets; and how we intend to work with you to implement some of the lessons that we’ve collectively learned."

Commenting briefly on ongoing measures to free up the UK's credit markets, Ms Ussher went on to add:

"At the same time as dealing with the ongoing disruption in financial markets though, we also have to think about what improvements we can and should make to the broader supervisory and legal framework for dealing with banks in difficulties, following the events of last summer."

"We set out some proposals in a consultation document that we published in January – and I want to say how grateful we are for all of the responses that we received from people here in this room, and from the organisations you represent."

"We know that there are some major issues to consider here, and we know how much importance you place on getting this right. And we agree – the last thing we want to do is to rush into these changes. So we are taking the time to consider the responses that we had to our consultation. And we’ll be holding another round of consultation over the summer, including publishing some draft clauses, as we continue to finalise our proposals."

Commenting on the objectives of planned banking reforms, the Economic Secretary to the Treasury announced that:

"The first... is to improve the stability and resilience of the financial system – which includes better risk management by banks; better stress testing; and better management of liquidity."

"We also need to look at the credit rating agencies – including concerns that have been raised about conflicts of interest, about the information content of ratings, and about investors’ over-reliance on them."

"The second objective is to reduce the likelihood of individual banks facing difficulties. We’re looking at strengthening the regulatory framework, and at the way that liquidity assistance is provided and disclosed."

"Our proposals here don’t mean taking responsibility for managing risk away from individual firms, and from the people in charge of them; and I want to be clear that we’re not going to create an environment in which no bank can fail."

"And so given that, our third objective is to reduce the impact if a bank does get into severe difficulty – and to make sure that we can deal with that in a way that minimises the impact on financial stability."

"Our proposal is to introduce a Special Resolution Regime, which would give the Tripartite Authorities a number of tools to resolve a failing bank in an orderly way: for example an accelerated method of transferring business to a healthy bank; and a way of allowing the Authorities to control all or part of a bank through a ‘bridge bank’."

She continued:

"Moving on, our fourth objective is to provide compensation arrangements that are effective, and that give customers confidence."

The fifth objective was revealed to be the need to improve co-ordination between authorities – both in the UK and internationally.

Ms Ussher explained that:

"We do think that the Tripartite arrangement is right for the UK – but that it needs some changes."

"So, we’re suggesting a statutory basis for the Bank’s role in financial stability, and developing the Memorandum of Understanding to learn some of the lessons of the last nine months, and perhaps make some of the responsibilities clearer."

"And we also need to make sure that co-operation across borders is effective. We want to work closely with our international partners, particularly to introduce an early warning system on global financial risks, and a better system of cross-border crisis management."

"These are, together, pretty major proposals – and of course we want to get them right. As I’ve said, we are taking our time to make sure we can do that, and to consult again before we introduce our legislation in the autumn."

She went on to stress the need to avoid a "knee jerk reaction" with regard to financial services regulation, explaining that despite recent calls to be more prescriptive in terms of regulation:

"We’re resisting calls for new regulation where we don’t think it’s necessary, or don’t think it’s appropriate."

"And on the reforms that we do plan to make to banking regulation, we’re taking the time to work as closely with you as possible, to make sure that we get this right."

"By doing that, I believe that we can ensure the continued strength of both the UK’s banking sector; and of the City of London as the world’s leading financial centre."

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