The “Purple Book” sets out how
English banks should prepare for a crisis.
The book brings together its thinking on regulation, including what sums
banks must set aside and in what form it must be structured. It also aims to protect taxpayers from the cost
of a big bank collapse. The new rules
are set to come into place in 2022 and are designed to make sure that even the
biggest banks (those who say they are “too big to fail”) can be dealt with
without taxpayers having to bear the burden of protecting the rest of the
system.
The new
Minimum Requirements for Own Funds and Eligible Requirements (MREL) mean giant
foreign banks must create special internal debt that would mean creditors being
“bailed in” rather than governments needing to bail them out. A bail-in means creditors of a bank will take
on some of the burden by having part of the debt they are owed written
off. The UK’s own banks have a shortfall
of the amount they need to have put by of £116bn, and they have until
2022 to raise these funds.
Sir
John Cunliffe, deputy governor for financial stability at the Bank, said, “Faced
with potentially disastrous consequences governments, the UK’s included, felt
they had no choice but to bail the banks out.
Resolution aims to change this.
It ensures banks can be allowed to fail in an orderly way. Just like when any other business fails,
losses arising from bank failure would be imposed on shareholders and
investors.”
http://www.bbc.com/news/business-41467614
http://www.bbc.com/news/business-41467614
It's interesting that the central bank is preparing for another banking crisis - I'm a little surprised that the purple book didn't mention the possible effects Brexit will have on the banking industry as the trade agreements to help EU countries borrow from each other go away.
ReplyDeleteThe "Purple Book" seems like a good idea because there is always the possibility of a banking crisis. It is nice that taxpayers would not be as heavily affected by big banks failing. Also, banks would have a fall back plan if they failed, and the government wouldn't have to bail them out as much. However, it will be interesting to see if the banks are able to raise a shortfall amount of £116 billion by 2022. If they are successful in raising the money, hopefully the "Purple Book" will be successful.
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