Bank of England orders lenders to 'pre-fund' customer payments

At present, banks pledge collateral held at the Bank of England to provide a pool of cash in the event a clearing bank were to run out of money, but since the financial crisis pressure has grown for more formal arrangements to be drawn up.

In particular, the near collapse of two major clearing banks at the height of the financial crisis in 2008, HBOS and Royal Bank of Scotland, showed the vulnerability of the payment system if a major institution were to fail.

HBOS and RBS both came close six years ago to running out of the necessary liquidity to back up customer payments forcing the government to put in place emergency plans to rescue the lenders.

As well as backing up payments to make the UK’s financial system more secure, the Bank of England is also proposing other changes aimed at increasing the system’s resilience to problems such as cyber attacks.

Officials at the Bank of England are developing a new security testing standard for the country’s main providers of financial infrastructure, such as payment systems and clearing houses. The “vulnerability tests”, when introduced, will become the standard for all of Britain’s key financial infrastructure and the work highlights the increased fears at the prospect of a major cyber attack on the UK banking system.

“Addressing cyber risk involves both enhancing controls against an attack and a recovery plan in the event that an attack succeeds. The Bank has been in detailed dialogue with FMIs [financial market infrastructure] about their capabilities and approach in respect of cyber risk, both to gauge current levels of resilience and to help define a good practice approach for core institutions,” said the Bank of England.

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