British retail banking is hogging the limelight today. The markets quickly began to absorb the news that the Co-operative Bank has been 'rescued' in a deal that takes it out of the Co-op group.
As they did so, Andrew Bailey, chief executive officer of the Financial Conduct Authority, delivered a thoughtful speech on retail banking to the BBA retail banking conference.
It is hard to think of many more important subjects in our world than the future of retail banking, he stated, before hitting the audience with a barrage of statistics.
- There are over 72 million personal current accounts in the UK
- There are retail deposits of over £1.5 trillion, comprising current accounts, savings products and SME banking
- Retail lending is a key driver of economic activity; UK households owe £1.3 trillion in mortgages and £198bn in consumer credit
- There are over 5.4 million SMEs in the UK
- There are over 61 million credit cards in issue in the UK
The rise of challenger banks
Bailey sees evidence of rapid change in an industry begetting 'challenger banks'. He notes that 16 brand new banks have been authorised over the last five years, with 38 in the pipeline, which must be a modern record, he says.
The rate of increase of use of digital and contactless channels is fast and unlikely to slow, he continues. That, however, is not necessarily good news, he suggests.
“With that goes a sharp increase in the frequency at which customers wish to extract information from their accounts,” he observes. “And, the scale of operational threats from fraud and cyber-attacks has increased.”
A decade on from Northern Rock crisis
His comments come not far from 10 years to the day that the global financial crisis began to emerge. The troubles experienced by Northern Rock were an early symptom, and part of the cause. He describes it as a house of cards.
The collapse of the house of cards demonstrated the vital importance of capital adequacy to individual banks and to the sector as a whole. Despite the efforts of regulators around the world, capital inadequacy remains an issue.
This is illustrated by the latest call for consultation by the Basel, Switzerland-based Bank for International Settlements, informally known as the central banks' central bank.
Capital according to the BIS
In January 2016, the Basel Committee on Banking Supervision published the standard Minimum capital requirements for market risk. The standard includes an internal models approach and a standardised approach to measuring market risk capital requirements.
In order to facilitate adoption of this standard for banks other than those that are large and internationally active, a new BIS document - its latest - sets out the Committee's proposal for a simplified alternative to the market risk standardised approach.
The proposed reduced sensitivities-based method represents a simplified version of the sensitivities-based method (SbM), which is the primary component of the standardised approach.
BIS, Basel, Switzerland, courtesy of BIS
Significant simplifications relative to the SbM include
- Removal of capital requirements for vega and curvature risks (vega is the measurement of an option's sensitivity to changes in the volatility of the underlying asset; curvature risk captures the non-linear risk, which is not accounted for by delta risk; delta risk measures the risk associated with the shift of the interest rate curve).
- Simplification of the basis risk calculation
- Reduction in risk factor granularity and the correlation scenarios to be applied in the associated calculations
The sum of three components
As proposed, for banks that adopt the reduced SbM, the standardised approach market risk capital requirement would be the sum of three components:
- the risk charges under the reduced SbM (as in the consultative document)
- the default risk charge
- the residual risk add-on, with the latter two to be calculated as specified in the January 2016 standard
The BIS says the Committee welcomes comments on all aspects of this consultative document and the proposed standards text. It asks for comments on the proposals to be uploaded here by Wednesday 27 September 2017.