Open Banking could lead to more bank runs – Co-op Bank regulation review

Open Banking could lead to more bank runs – Co-op Bank regulation review

The independent review into prudential supervision of Co-operative Bank has warned that Open Banking could lead to more runs on smaller banks and building societies.

 

Mark Zelmer, who conducted the review, highlighted that smaller institutions could now be more vulnerable to systemic issues and may find their deposits are less consistent due to partnerships with new technology providers.

He noted that third-party providers may be more likely to take, or advise depositors to withdraw, money from institutions under duress despite any safeguards in place to preserve their reputations.

In assessing changes made to the regulatory structure since the financial crisis and the near collapse of the Co-operative Bank, Zelmer was generally encouraged that UK authorities could handle such one-off situations.

But he noted that this may not be the case for systemic situations where the financial system as a whole or important segments of it encountered stress.

 

Smaller institutions more vulnerable

“Indeed, I think the likelihood of such systemic situations involving smaller institutions may in fact be greater in the future,” he said.

Zelmer warned that past experience has shown that runs on deposits can happen fast in a digital world, and this risk may continue to grow with the introduction of Open Banking.

“At the first hint of any problems those third party providers may be highly motivated to move money away (or encourage their deposit clients to do so) from a potentially troubled institution, no matter how strong the deposit insurance scheme or the resolution toolkit, to protect their own reputations,” he continued.

“Thus, I would not be surprised if smaller institutions find their deposit bases become less sticky over time and more likely to run at the first hint of troubles.

“Given many smaller institutions such as building societies often have similar business models, contagion risk, and hence the risk of systemic situations for those institutions and their sectors of the financial system, may well be higher in the future than has been the case up to now,” he added.

As a result, Zelmer recommended that the Prudential regulation Authority (PRA) and Bank of England (BoE) should continue to study how best to use tools which have since been introduced to manage institution failures in systemic situations.

This should include considering how Open Banking may affect their use in this regard, he added.

 

More progress for systemic situations

In response, the BoE and PRA said they agreed with this recommendation, adding that the bank has made significant progress in improving the resolvability of firms as part of the broader ‘too big to fail’ agenda.

“The bank acknowledges that more progress needs to be made where failures occur in systemic situations,” it said.

“While the bank is solely responsible as resolution authority for exercising the statutory resolution tools, the PRA will continue to apply its rule-making powers where appropriate to improve the resolvability of firms,” it added.

The recommendation is one of a series made by Zelmer in the report, which also highlights failings by then regulator the Financial Services Authority in its oversight of the Co-op Bank.

 

Owain Thomas is features and contributing editor of Mortgage Solutions and editor of Specialist Lending Solutions.
He also has experience in the protection, pensions, workplace benefits and HR areas.
Owain has won two Headline Money Awards and the Protection Review’s Journalist of the Year award.

SOURCE: mortgagesolutions

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