UK Debuts Rules to Protect Lenders Against Bank Runs

The central bank’s Prudential Regulation Authority (PRA) released a report Tuesday (March 17) that includes a new liquidity framework designed to help banks better convert assets into cash during stress events like the crisis that brought down Silicon Valley Bank in 2023.

“Since the existing liquidity framework was developed, advancements in the use and scale of digital banking, payments and communications have changed the nature of liquidity risks faced by firms,” the report said.

“Technological developments in banking, payments and communication have been significant factors in confidence being lost more rapidly and runs occurring and spreading at a speed that was not fully foreseen when the regulation was designed.”

The proposals include calling for banks to carry out internal stress tests to gauge how they would respond to rapid outflows inside of a week.

“We’ve focused the changes not on increasing the amount of liquid assets banks have to hold, but instead on making sure that those assets do what they say on the tin and really are usable in the event of a run,” said Sam Woods, chief executive of the PRA, told Reuters after the report’s release.

The Reuters report also noted that experts are warning that the PRA needs to take a cautious approach to new regulations.

“The PRA will need to think carefully when imposing additional liquidity requirements on firms as a result of the new stress test,” said Rob Dedman, a partner at law firm CMS and former head of enforcement for the authority.

“Historically, the PRA has been criticized for imposing disproportionate requirements on smaller firms,” he added. “Any PRA intervention in the sector will need to take account of the fact that smaller firms may need longer to meet additional liquidity requirements than their larger peers.”

In other financial regulation news, PYMNTS wrote last week about the impact of potential regulation on the embedded finance space. Regulation, that report said, could add cost, slow launches and force weaker operators out of the market.

“But that is only half the story. Embedded finance is growing into something too large to remain informal,” PYMNTS added.

Bain has estimated embedded finance transaction value in the U.S. will top $7 trillion this year, while. PYMNTS Intelligence indicates the market is ready for that maturation.

“Firms are prioritizing trust, transparency and governance over quick wins,” the report said. “In that environment, regulation can function like a common rulebook. It reduces uncertainty for banks. It raises confidence for platforms. It can make embedded finance easier to buy, not harder, because the buyer can point to standards rather than promises.”