Big banks vs little banks in the battle of who pays for failure

SNEAK PEEK

— Banks: who pays if smaller ones collapse?

— Budget highs, lows, and no-gos.

—City minister meets with top female finance gurus ahead of International Women’s Day.

Good morning! Today we’ve got battling banks, budget chat and crypto. Keep reading!

DRIVING THE DAY

BIG BANKS AND SMALL BANKS BATTLE OVER WHO SHOULD PAY IN A COLLAPSE: The U.K. banking industry is split over who should foot the bill if a smaller lender collapses, as the government today closes a consultation on reforms to protect the taxpayer in the aftermath of the failure of Silicon Valley Bank.

SVB lessons: The U.K. Treasury proposed in January that the U.K. banking industry as a whole should have to cough up to cover the costs of a smaller bank’s failure. The reforms followed the collapse of SVB, a mid-sized U.S. tech lender, in March last year, which also triggered the demise of its British arm and spread further turmoil across the banking system. 

The big investment banks don’t think they should have to pay: The Association for Financial Markets in Europe (AFME) said in its response to the Treasury consultation that the plan goes against the idea that the party responsible should pay for the damage. There should be a more “targeted” solution to recouping funds from the industry, via smaller banks themselves, said the trade body, which represents large global players.

Banks that don’t have to raise loss-absorbing debt should have to cough up, or have to pay more proportionately, AFME said. And subsidiaries of big international banks should be excluded. Plus, the influential organization said the costs imposed on the industry should be less than if a failing small bank was put into insolvency like any other business. 

At the other end, U.K. building societies also want to be scoped out. Ruth Doubleday, head of prudential regulation at the Building Societies Association (BSA), said government policies were being “blindly applied to building societies and credit unions despite significant differences in business and funding models, and risk.”

“We believe that there is more room for proportionality in these proposals, for example to avoid credit unions paying for the recapitalisation of failing firms despite the fact they cannot benefit from this scheme,” she said.

This is a challenging issue: Since the global financial crisis, big banks have been forced to raise loss-absorbing capital and come up with living wills so that shareholders and creditors are on the hook in a collapse rather than taxpayers. Smaller banks have struggled to raise that riskier capital but they don’t generally pose such a big risk of contagion to the financial system as a whole.

Contagion: But SVB showed that problems at one bank can trigger a domino effect if investors become concerned that there could be similar issues at other lenders. The government proposed the Bank of England should be able to use an industry levy to recapitalize or sell the assets of that bank. 

The bottom line: The U.K. banking industry won’t face any new costs immediately, but it would have to replenish any funds used from the Financial Services Compensation Scheme (FSCS) to a maximum of £1.5 billion a year. Now the fight is over who exactly should be on the hook.

WHAT’S ON

The Treasury closes a consultation on reforms to the U.K. bank resolution regime.

The Basel Committee on Banking Supervision publishes a consultation on “window-dressing.”

The Bank of Spain hosts a conference on diversity in finance and central banking.

Bank of England’s monthly Decision Maker Panel data for February 2024 published, 9:30 a.m.

Tapestry Networks is hosting a Financial Services Leadership Network, 2 p.m.

James Benford, executive director at the Bank of England, gives speech at the Big Data & AI World conference, 10 a.m.

**A message from Nationwide: Unlike the banks, Nationwide Building Society is owned by its members, not shareholders. That’s anyone who banks, saves or has a mortgage with us. Which means we can always focus on what’s best for them. It’s our fundamental difference and what makes us a good way to bank.**

ECONOMY

IT’S OVER: Well, what to make of yesterday’s budget. Jeremy Hunt announced almost all of what was briefed to the media pre-spring budget, with no real surprises or a “rabbit out of the hat.” Here are the MFS U.K. main takeaways from the day that was. 

Cuts cuts cuts: The chancellor announced a widely anticipated second successive 2p cut to National Insurance, but no reduction to income tax. OBR chair, Richard Hughes, said that despite the cuts, the total burden on the British public will remain higher than any period after the second world war. Ouch. Hunt also hinted at ending the “double taxation” of NI which will excite many in his party. But doing so would cost £50 billion — again, ouch. The VAT registration threshold will be increased from £85,000 to £90,000 from the start of April, too. 

Investment: The Great British ISA is here, and the government will consult on it between now and June. But, according to broker AJ Bell, the plan is “doomed to fail.” Hunt announced the sale of its holding in NatWest, to take place by summer, plus the introduction of British Savings Bonds, offered through NS&I, at a fixed rate of 3 percent over three years. Elsewhere, the government looks committed to a “pot for life” pension, but will further consult on it. The government will also regulate ESG ratings providers. 

Frozen: Hunt extended the freezes to booze and fuel duty, introduced a new duty on vapes from 2026 and abolished the “multiple dwellings relief.” He went ahead and nicked Labour’s plans to scrap non-dom tax status, introducing a new plan that he claims is a “modern, simpler, residency-based system.” He also reduced the higher rate of property capital gains tax from 28 percent to 24 percent, and binned tax breaks for furnished holiday lets. 

A rabbit — sort of: One shock was a shake up to child benefit rules. The chancellor raised the threshold at which high-income families have to start paying back their child benefit, with the current thresholds being moved in April 2024 to £60,000 and £80,000. 

What’s missing: Despite courting the industry for months, there were no changes to the Lifetime ISA. Consumer champion Martin Lewis said on X/Twitter that Hunt spoke to him this week and said: “I want to do more than remove the penalty, I want to reform LISAs.” Watch this space. The chancellor also didn’t cut stamp duty on shares and dividends tax, meaning millions more people will pay tax on investment gains. 

Tight: Today’s policies mean Hunt is on target to meet his own primary fiscal rules by just £8.9 billion, down from £13 billion in November — so the next budget, either Tory or Labour, will be very interesting as the cupboard is bare. 

Will Snell, CEO of the Fairness Foundation, said: “This budget has failed to deliver what the public want: more investment in schools, hospitals and the crucial services we all rely on daily. Not tax cuts funded by cuts to essential public services after the general election.”

To come: A Parliament Treasury Committee grilling. MPs will hold a session with the OBR and economists on March 12, and with Jeremy Hunt on March 13.

MARKETS

IS THE CITY ON BOARD WITH VALUE FOR MONEY BENCHMARKS? City players on Wednesday backed Chancellor Jeremy Hunt’s budget plans to bring in “value for money” benchmarks to weed out badly performing pension schemes — in stark contrast to the financial industry’s attitude toward a similar attempt in Brussels. 

U.K. insurers, fund managers and pension funds all had warm words for the proposal — which is intended to improve outcomes for savers and consolidate the pensions market. “The framework will highlight where schemes are focusing on short-term cost savings at the expense of long-term investment outcomes, and where schemes’ current scale may be preventing them from offering value to savers,” the government said in the budget document.

How will this work? Under the plans, defined contribution pension schemes — where savers pay into a pot but are not guaranteed retirement incomes — would have to publicly compare their performance and costs against competitors, including at least two schemes managing at least £10 billion in assets. Schemes performing badly won’t be able to take on new business. The Financial Conduct Authority will set out the details in a consultation which will require pension schemes to publish historic net investment returns and a breakdown of their U.K. investments.

EU contrast: But while the City seems to be on board, in the EU, the financial industry has fought hard against proposed “value for money” benchmarks for retail investment — arguing they are effectively a price intervention in the market. The U.K. industry seems to view the benchmarks the opposite way — as a means to include performance alongside costs. 

Belgian plans: Under the latest proposals in the EU, the Belgian presidency of the Council of the EU is today floating a compromise that wouldn’t ban investment products that cost more than the benchmark and would give the industry more leeway to justify pricey products. (You can read more in our sister EU newsletter.)

BESPOKE INSIDER TRADING REGIME FOR PISCES: The Chancellor also unveiled his plans for PISCES — a trading venue that sits in between public and private markets. The Private Intermittent Securities and Capital Exchange Systems proposals, which are intended to get more companies to list on the U.K.’s languishing stock markets, are out for consultation until April 17. 

The sun is in Pisces, right now: The plans would allow private companies to trade some of their shares on a market without having to make loads of public disclosures — in an effort to attract smaller, growing companies and create a pipeline for initial public offerings, eventually. Plus, investors would get access to more companies than if they stayed totally private. 

Brexit breakaway? In the consultation, the government said PISCES would operate as a secondary market but won’t fit into existing buckets for trading venues, inherited from the EU. It’ll offer investors trading windows, such as monthly or quarterly, and disclosures to investors will only take place then and won’t be public beyond that. 

Market abuse safeguards: That creates some risks for market abuse. The government is proposing a “tailored” market abuse regime, which would only apply around the trading windows — allowing companies to keep sharing information with investors outside of those windows without those rules applying. But there would be an offense for unlawful disclosure of inside information, as in public markets, and market manipulation and insider dealing would also be caught.

Restricted access: Retail investors won’t be able to take part — at least at first. But the government is also weighing whether to allow “sophisticated investors,” high-net worth individuals and company employees to participate. 

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WOMEN IN FINANCE

BREAKING BARRIERS: MFS U.K. understands that City minister Bim Afolami will hold a roundtable in Downing Street today with a group of the City’s top female finance gurus ahead of International Women’s Day on Friday. 

What’s on: Likely topics on the menu will be what can be done to tackle the barriers women face in business and investing, how the government and City can encourage more female entrepreneurs and investors, and potential areas of support. Some members were also integral in discussions around Angel Investors reforms, which were announced by the Treasury earlier this week. 

Attendees include…Grace Beverley, founder of TALA, Erika Brodnock MBE, Carol Knight and Faith Reynolds of TISA, Emma Sinclair of Enterprise Alumni, Martha Dalton of Lodestone, Emma Wright of Harbottle and Lewis law firm and cofounder of InvestHER, Lavinia Osbourne, Anna Brading of Mentora Money, and Jenny Tooth of UK Business Angels.

CRYPTO

CRYPTOASSET REPORTING FRAMEWORK COULD EARN EXCHEQUER MILLIONS: The government, in its deluge of post-budget documents, announced yesterday a consultation on the future of taxing cryptoassets. The government has calculated that, if properly implemented, a new reporting framework will provide the taxman with access to standardized information to help identify and tackle tax non-compliance, which could bring the exchequer £35 million between 2026-7 and £95 million between 2027-8. 

Non-existent taxes: Because of the nature of the crypto industry, it’s typically been difficult to tackle tax evasion and avoidance. Cryptoassets can be transferred without financial intermediaries, so the taxman can’t take a cut. But in 2022 the OECD launched its Cryptoasset Reporting Framework (CARF), which involves the automatic exchange of tax information on transactions in cryptoassets. The U.K. is now implementing its rules based on the OECD’s CARF.

Do write in: The government wants to hear from relevant parties — businesses, lawyers, tax advisors — on what they think about implementation. By implementing CARF, the UK government wants to get the taxes they believe they’re owed, and also support sector growth by creating a standardized transparency framework.

FRAUD

MoD CONTRACTOR CONVICTED FOR MISCONDUCT: Jeffrey Cook, a former employee at the U.K. government’s Ministry of Defence, has been convicted for taking secret payments of over £70,000 in exchange for commissioning offshore consultants to work for the MoD. The Serious Fraud Office secured the conviction for misconduct in public office yesterday. Cook was employed at the MoD, but seconded to a defense contractor, Paradigm, owned by Airbus. The commissioned work was five reports (between 2004 and 2008) for the MoD, focused on providing military communications and equipment for the Saudi Arabian National Guard. Cook will be sentenced at Southwark Crown Court on 12 April.

WHAT WE’RE READING

Lex Greensill has sued the U.K. government over misuse of private information, according to the FT.

AP News reports that new SEC rules will require companies to publicly disclose climate risks.

Bitcoin’s value is soaring, but smaller tokens have outperformed it, writes Bloomberg.

UBS chief hits out at European regulators for letting US banks dominate, in the FT.

Thanks to: Fiona Maxwell & Izabella Kaminska.

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