UK Law Set to Automatically Recognise Bank of England’s Bail-in Powers
The UK government has announced plans to automatically recognise the Bank of England’s bail-in powers under new legislation, aimed at bolstering financial stability and enhancing the effectiveness of the country’s banking resolution framework.
Automatic Recognition of Bail-in Powers
Under the revised regulations, financial contracts governed by non-UK law will be required to include contractual stay provisions, which prevent counterparties from terminating agreements in the event a bank enters resolution. However, this requirement will not apply to contracts governed by UK law, as the Bank of England’s general stay powers will automatically come into effect.
Strengthening Financial Stability
The move is seen as a significant step forward in strengthening the country’s financial system, particularly in light of the ongoing challenges posed by Brexit.
UK Banks Face Stricter Rules on Derivatives Trading
In related news, UK banks are subject to various rules governing derivatives trading, including:
- Conduct of business rules derived from MiFID
- Requirements to trade certain interest rate swaps and credit default swaps on a trading venue
- Mandatory clearing, margining, and reporting requirements for over-the-counter (OTC) derivatives under EMIR
- Restrictions and obligations under MAR, SSR, and DTR
Capital Requirements and Liquidity Rules
UK banks are also subject to rigorous regulatory capital and liquidity requirements. These include:
- Determination of capital requirements based on the size of their balance sheet and the value and riskiness of their exposures
- Holding of capital against credit risk, market risk, and operational risk
- Use of an internal model for calculating capital requirements, allowing banks to adopt a more nuanced approach
- Introduction of a “strong and simple” regime for new and growing banks, aimed at streamlining capital and other prudential requirements
- Rigorous liquidity rules designed to ensure banks have sufficient high-quality liquid assets to meet their obligations over a 30-day stress period
Conclusion
The UK government’s move to automatically recognise the Bank of England’s bail-in powers is a significant step forward in strengthening the country’s financial system. The revised regulations will enhance the effectiveness of the banking resolution framework and provide greater stability for the financial sector. As the UK continues to navigate the challenges posed by Brexit, this development is likely to be welcomed by the industry and regulators alike.