Bank of England targets 'failures' in banks' trading books

LONDON: Banks must show from 2025 how their trading operations could be shut down in a crisis without spreading contagion across markets, the Bank of England proposed on Friday.

Since the global financial crisis in 2008-09, banks must have plans vetted by regulators showing how collapsing operations could be shut down or transferred without destabilising markets or the need for taxpayer bail-outs.

The proposals set out on Friday go further with more granular demands regarding trading books loaded with stocks, bonds, and derivatives worth billions of pounds.

Following a public consultation, the BoE will publish final policy changes in the first half of 2022 which banks will have to implement by January 2025.

The BoE said its Prudential Regulation Authority (PRA) carried out exercises between 2014 and 2021 which demonstrated that firms lack the full capabilities required to carry out an orderly wind-down of their trading activities.

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"The PRA considers this lack of capabilities to be a market failure, posing risks to the PRA's safety and soundness objective, and has therefore decided to clarify its expectations in this area," the BoE said.

"For the largest firms, the destruction of trading book asset value in disorderly wind-down risks impacting UK financial stability, due to the scale and interconnectivity of their trading activities."

Applying the proposed new rules would mean a one-off cost of 12 million pounds ($16.35 million) as banks may have to restructure operations to make the plans workable. Annual maintenance costs would be 2.5 million pounds, the BoE said.

Regulators are under pressure from industry and some lawmakers to ease rules on banks to maintain the City of London as a global financial centre after being cut off from the European Union by Brexit.

The BoE said its proposals were in line with a requirement to have regard to competitiveness as they reinforce market resilience.

"This would help to ensure that the UK remains an attractive domicile for internationally active financial institutions and that London retains its position as a leading international financial centre," the BoE said.