A significant and controversial shift in banking regulation is underway that could fundamentally change how consumers gauge the financial health of their banks. The Bank of England's Prudential Regulation Authority (PRA) has introduced a new rule that allows struggling banks to temporarily conceal crucial warning signs from public view.
The change targets the 'leverage ratio', a key measure of a bank's financial strength calculated by comparing its core capital to its total loans. Previously, banks were required to publicly disclose this ratio, providing a clear signal to depositors and investors. Under the new framework, the PRA can now grant permission for banks to suppress this critical disclosure during periods of financial strain.
The Rationale Behind the Secrecy
Officials argue this measure is a necessary tool to prevent modern bank runs. In today's digital age, where news and rumours spread instantaneously online, regulators fear that a publicly falling leverage ratio could trigger a panic-driven withdrawal of deposits, potentially accelerating a bank's collapse.
This 'information barrier' is designed to give a struggling bank and its regulators breathing room to execute a rescue plan, arrange a sale, or wind down operations in an orderly manner without sparking a public crisis of confidence.
A Double-Edged Sword for Consumers
While the intent is to ensure systemic stability, the move has profound implications for consumer rights and transparency. Savers and small businesses could be left in the dark about the true financial state of their bank until it is potentially too late to move their money.
The existing Financial Services Compensation Scheme (FSCS) still protects deposits up to £85,000 per person, per institution. However, this new rule could mean customers are unaware of the need to rely on this safety net until the moment a bank is already on the verge of collapse.
Learning from Recent History
The policy appears to be a direct lesson from the sudden failures of institutions like Silicon Valley Bank and Credit Suisse, where rapid digital bank runs overwhelmed the institutions in a matter of hours. UK regulators are effectively prioritising the prevention of panic over the public's right to know, betting that managed secrecy is safer than uncontrolled transparency in a crisis.
This pivotal change marks a new era in banking regulation, where the signs of a bank 'going under' may no longer be visible to the very people it serves.
