Banking Supervision and the Special Resolution Regime of the Banking Act 2009: The Unfinished Reform

Abstract:     
One of the fundamental rationales underpinning banking regulation and justifying the costs it entails is the prevention of banking failures and associated depositor runs. This is exactly what the UK regulators could not prevent during the Northern Rock crisis. Apart from the much discussed regulatory failures, the Northern Rock crisis also exposed the absence of an effective legal system dealing with failing banks. The Banking Act 2009 introduces a number of important and far reaching reforms, including a Special Resolution Regime (SRR) for failing banks. The reforms address several of the identified regulatory loopholes. Thus, the Act constitutes a significant improvement over the previous regime. Yet the Act does not seek to reform banking supervision arrangements, even though these have become the subject of considerable criticism. This article argues that, in addition to other reasons, the effective operation of the SRR requires the reform of the institutional structures of the UK system of banking supervision. Otherwise the serious governance challenges and distributional issues the SRR creates may seriously undermine the standing of the SRR authorities, namely, the Treasury, the FSA, and the Bank of England, and have an adverse impact on the effectiveness of the new regime.

Keywords: Special Resolution Regime for Banks, Banking Supervision, Banking Act 2009, Northern Rock, Global Financial Crisis, Liquidity Regulation

JEL Classifications: G28, K22, K23

Accepted Paper Series