- Bank regulation
- Bank regulation is the set of rules intended to keep banks solvent by stopping them from taking excessive risk.
- Bank capital
- Bank capital is a bank's net worth, equal to the value of its assets minus the value of its liabilities.
The main UK reforms after 2008
Can you name the four main reforms the UK made to bank regulation after 2008?
Each guards against a different weakness that the 2008 crisis exposed in banks.
Capital requirements make a bank keep a minimum net worth, usually set as a share of its assets, to protect its depositors and other creditors.
Can you think of an example?
A bank with £100 billion of assets and a 10 per cent requirement must hold £10 billion of capital. If £4 billion of its loans go bad, capital absorbs the loss and depositors are still repaid.
Liquidity requirements make a bank hold enough cash and assets it can sell quickly to meet a rush of withdrawals without failing.
Can you think of an example?
Depositors pull £5 billion out of a bank in a week. It pays them from government bonds it can sell within a day, instead of calling in loans to firms.
Ring-fencing separates core retail banking services from investment banking at the largest banks, to protect depositors from risks arising elsewhere in the bank.
Can you think of an example?
Since the regime came into force in January 2019, a large bank keeps its current accounts and mortgages in one company and its trading business in another, so losses on trading are kept away from household deposits.
A resolution regime lets the authorities deal with a failing bank in an orderly way, keeping its critical services running without taxpayer support.
Can you think of an example?
A large bank's losses wipe out its capital. Instead of a taxpayer rescue, the authorities take control over a weekend, and customers keep using their accounts on Monday.