Banking Act 2009: A Comprehensive Guide

The Banking Act 2009 was a significant piece of legislation that aimed to strengthen the banking system in the UK. It was enacted in response to the global financial crisis.

The Act introduced a new framework for banking regulation, which included the creation of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). These two regulators were responsible for overseeing the banking system and ensuring its stability.

The PRA was given the task of regulating banks' prudential risks, such as their capital adequacy and liquidity. The FCA, on the other hand, was responsible for regulating banks' conduct and ensuring that they treated their customers fairly.

The Act also introduced new requirements for banks to hold a minimum amount of capital and to maintain a certain level of liquidity.

The Banking Act 2009 introduced significant changes to the banking sector, and understanding the assessment and procedures is crucial for compliance.

The Act requires banks to maintain a minimum capital adequacy ratio of 8% to ensure stability and prevent risk-taking.

Banks must also conduct regular stress tests to assess their ability to withstand economic downturns.

The Act mandates that banks submit regular reports to the regulator, providing detailed information on their financial health and risk management strategies.

These reports enable the regulator to monitor the banks' compliance with the Act and take corrective action if necessary.

The UK's Special Resolution Regime (SRR) Act is a comprehensive piece of legislation that aims to stabilize the financial system in the event of a bank failure.

The Act comprises eight parts, which deal with various aspects of bank stabilization, including the three stabilisation options and changes to the Financial Services Compensation Scheme (FSCS) arrangements.

The three stabilisation options give the relevant authorities the power to transfer all or part of a bank's business to a private sector buyer, a 'bridge bank', or temporarily into public ownership.

These options are designed to be used in a sequence, with the goal of stabilizing the bank before selling it on to a private sector buyer.

Here are the three stabilisation options in more detail:

The SRR objectives are designed to protect and enhance the stability of the UK financial systems, public confidence in the banking systems, depositors, public funds, and property rights.

Assessing Condition 2 Under Section 7(3) is a crucial step in the assessment process. This condition is defined as a situation where the applicant has not provided a valid reason for the delay in completing the required documents.

The applicant must provide a valid reason for the delay, which can be a medical condition, a family emergency, or any other unforeseen circumstance. This reason must be supported by evidence.

According to Section 7(3), the applicant has a certain timeframe to provide the required documents. This timeframe is typically 30 days from the date of the request.

Partial transfers are a key feature of the Act, allowing the Bank of England to split a bank's business and transfer the good parts to a private sector purchaser or bridge bank. This option is likely to be used for failing banks.

The partial transfer option has raised concerns about potential negative effects, including higher funding costs and higher requirements for regulatory capital, ultimately resulting in a loss of competitiveness.

The Government has sought to address these concerns by introducing safeguards through secondary legislation.

These safeguards include restrictions on the scope of certain types of partial transfers, safeguards to protect set off and netting, structured finance and security arrangements, and a third party compensation mechanism.

The third party compensation mechanism is designed to provide minimum compensation to creditors left in a residual company, so they will be no worse off than they would be had the whole bank been placed into liquidation.

The Stabilization and Insolvency section of the Banking Act 2009 outlines the steps taken to stabilize a failing bank. The Special Resolution Regime (SRR) is triggered by the Financial Services Authority (FSA), which then allows the Bank of England (BofE) to transfer the failing bank to a private sector purchaser or a 'bridge bank'.

To transfer a failing bank, the BofE must be satisfied that Condition A of Section 8 of the Act is met, which involves considering the public interest in the stability of the UK's financial systems, public confidence, and the protection of depositors.

The BofE's preferred option is to transfer a failing bank to a private sector purchaser, with the intention of selling the shares in the bridge bank to a private sector buyer as a second option. If neither of these options is feasible, the last resort is for the government to take a failing bank into public ownership under certain conditions.

The special resolution objectives are outlined in Section 4 of the Act, which include protecting the stability of the UK financial systems, public confidence, depositors, public funds, and property rights.

The SRR has a specific trigger that must be met before the stabilisation options can be used. This trigger is the responsibility of the FSA, which must be satisfied that the bank is failing or likely to fail the FSA's threshold conditions.

The FSA's threshold conditions are outlined in Schedule 6 of the Financial Services and Markets Act 2000 (FSMA), and they represent the minimum conditions a firm must continue to satisfy to remain authorised by the FSA.

The FSA must also consult with the BofE and HMT before determining that it is not reasonably likely that action will be taken by or in respect of the bank that will enable it to satisfy the threshold conditions.

The FSA's threshold conditions are not just about a firm's financial resources, so it's possible for a bank to be failing to meet them even if it's not insolvent and has a positive value.

In the event that a potential buyer wants to purchase a failing bank, it's essential that they enter into a dialogue with the FSA to determine the specific reasons for the bank's failure to meet the threshold conditions.

The Stabilization Options available to the Bank of England (BofE) include transferring a failing bank to a private sector purchaser or a 'bridge bank'.

A bridge bank is a company wholly owned by the BofE, and only the business of a failing bank can be transferred to it.

To exercise these powers, the BofE must be satisfied that Condition A of Section 8 of the Act is met. This condition requires the BofE to have regard to the public interest in three key areas:

HMT's preferred option is to transfer a failing bank to a private sector purchaser, with a transfer of assets to a bridge bank being the next preferred option. The intention is to eventually sell the shares in the bridge bank to a private sector buyer.

The Banking Act 2009 has various factors that the Financial Services Authority (FSA) considers when evaluating a bank's compliance with threshold conditions.

In assessing a bank's compliance, the FSA will look at the likelihood and impact of remedial action being taken. This means they'll consider whether the bank can take steps to improve its situation and become compliant again.

The FSA will take into account the bank's liquidity, including whether it has enough money to meet its financial obligations. They'll also consider the bank's capital, which is the amount of money it has set aside to cover potential losses.

When evaluating a bank's non-financial resources or suitability, the FSA will consider factors such as management expertise and technology. They'll also look at other Handbook provisions, such as those related to governance and risk management.

The FSA may also consider the prospects of the bank securing a material and relevant transaction with a third party, such as a sale of the bank or part of its business. This could be a sale of the bank itself, or a sale of all or part of its business.

The FSA will have regard to factors such as the likelihood of the transaction being completed, the impact on the bank's compliance, and the timescale in which a return to compliance will be effected.