Banks cry out for caution with new SRR

The British government is considering implementing a new Special Resolution Regime (SRR) in the wake of the collapse of Northern Rock.

If this new plan of the Treasury’s goes ahead, banks in trouble would have the option to transfer retail deposits to a different bank, before taking actions to liquidate.

Banking authorities across the country are hesitant to accept the change, with the London Investment Banking Association’s chairman, Alan Yarrow, calling for caution and avoiding implementing schemes based on those operational in the US, as they wouldn’t have the same benefits in the UK market.

Yarrow went on to say that moves towards the change had to be slow, to ensure all possible ramifications can be explored and accounted for.

Other concerns raised by banking associations revolved around the possible uncertainty that would surround bespoke derivative contracts and their subsequent status.

The British Bankers’ Association stated that the SRR could reduce the appeal for financial companies to work in London, as well as giving depositors preferred creditor status, which could lead to banking transaction fees increasing.

In conjunction with the new SRR, the British government is also looking at increasing the minimum percentage of total assets kept in forms that can be turned into cash within 8 days.

At this stage, most banks keep about 20% of their assets in this fashion, however the law only required 3.5%.

Chief executive of the Financial Services Authority (FSA), Hector Sants, stated that even 20% will not ensure that all banks are adequately liquidated.

Sants went on to say that there are still too many banks that are not properly managing risks associated with credit or holding adequate capital.

The FSA chief also warned banks to be cautious of the higher risks for commercial borrowers due to major exposures, and said that there was still too strong a focus on the buy to let market which is leading to too many mortgage books being bought and not enough concern being given to current funding issues.

The FSA have been working towards an updated liquidity policy for the UK for some time.

However with the worldwide effects of crisis in the credit market, the authority have had to change tack and speed up their work, and a paper is set to be released from them in August.

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