FINANCIAL MARKET AND OPERATIONS

Financial Market and Operations

Financial Market and Operations

Challenges to the UK Banking Sector

The focus of banks' risk management has developed and evolved over the past few years. The focus is now increasingly on reputational, regulatory, operational and strategic risk, as well as the more traditional credit and market dimensions of risk.

This is conditioned by a combination of factors including:

Globalization;

the relatively favorable economic environment - such that the UK banking sector has made record profits again this year, it remains highly capitalized and asset quality remains strong;

the fact that most banks' market and credit risk management has improved significantly in recent times;

the reputational impact that high profile regulatory issues are seen to have had - on both the retail and wholesale side - and the shift in the regulator's focus towards governance and control issues; and

the unprecedented volume of regulatory change that we are all facing

Aims and Objectives of the proposing New Banking Model

As the challenges and drawbacks for the banking sector have already been discussed, therefore by making changes and introducing new model following objectives will be achieved;

Safeguarding Deposit

Operating Secure Payments

Effectively channelling of savings

productive investments in the economy

Beginning of the Banking crisis

The banking crisis of August 2007 onwards revealed major structural flaws in banking systems around the world. In particular, it exposed the reality that governments felt unable to allow systemically important financial institutions to fail—the 'too important to fail' problem so that firms had an implicit government guarantee. This reluctance to allow such firms to fail reflects the high costs that would be associated with the failure of a systemically important bank which provides critical financial services to individuals and businesses, such as payments systems, and which is heavily connected to the rest of the financial system (thenigerianvoice.com, 2011).

. The consequence however is, as we noted in our recent report on competition and choice in retail banking, that “firms which are perceived as 'too important to fail' are both protected from the discipline of the market place and derive tangible benefits from this status.

The last point is motivated by a desire to minimize the danger that, on some future occasion, the Government may again find itself in a situation where a bank in difficulties is considered to be too important to fail, and taxpayer money has to be committed to bail the bank out.

To promote these objectives, the Proposed Model is proposing the following measures:

Structural interventions designed to ring-fence retail banking in order to protect depositors and to protect the payments system against the fallout from risks inherent in the banks' other operations, most importantly, investment banking and the banks' own trading books. Ring-fencing is also considered to ease problems in resolution.

Stricter regulation of funding is intended to improve the banks' ability to absorb losses. In ring-fenced retail banking, the proposed regulation goes beyond the requirements set out in the new Basel Accord (“Basel III”). In other areas, the Proposed Modelconsiders Basel III requirements to be sufficient. For ring-fenced retail banking, the Proposed Model proposes a combination ...