The Current Account: The Latest Headlines From Across The Banking Sector - August

Welcome to the latest edition of The Current Account! This month's headlines look at the highlights from the Bank of England’s 2022/23 cyclical stress testing results, along with the revolution brought by digital wallets, highlighted by Apple's Tap to Pay service.

UK Banking System's Resilience in Stress Tests and Bank of England's Risk Management Measures.

• The Bank of England's 22/23 stress test aimed to assess the resilience of the UK banking system against various shocks such as recessions, asset price falls, interest rate changes, and misconduct costs.
• Despite the positive results of these stress tests, the Bank of England warns of potential vulnerabilities in the global financial system, including a worsening economic outlook, high inflation, and geopolitical tensions.
• The Bank's operational decisions include the unwinding of quantitative easing, the introduction of the Short-Term Repo to maintain interest rates and other strategic moves influenced by Monetary Policy Committee (MPC) decisions.
• The UK's eight largest lenders, including Barclays and Lloyds Banking Group, all passed the stress tests with sufficient capital to continue lending through a severe economic downturn, including a housing market crash, surging unemployment, and interest rates as high as 6%. The banks were found to have high-quality liquid assets, with a market value of £1.4 trillion, providing ample resources to continue lending in the event of liquidity stress.
• The British pound reached a new peak, hitting its highest level in 15 months following the results of the stress test indicating that confidence in the economy grew stronger, leading to increased expectations of further rate hikes by the BoE in the future.

PEN Perspective:

The UK banking system's resilience in stress tests is encouraging however ongoing and emerging risks require continued vigilance. The Bank of England's proactive approach to risk management, reflected in operational decisions and the actions taken by the Monetary Policy Committee (MPC), contributes to the system's robustness. Nonetheless, potential vulnerabilities arising from a challenging economic outlook, inflationary pressures, and geopolitical tensions cannot be ignored. Therefore, proactive risk management measures and collaborative efforts among banks, regulators, and policymakers are crucial for maintaining stability. We recommend prioritising effective risk management and robust regulatory frameworks to help protect stakeholders and ultimately ensure a resilient financial system.

Digital Wallets Revolution - Apple's Tap to Pay sets the stage.

• Apple's Tap to Pay service made its debut in the UK, partnering with Revolut and Natwest, aiming at the business and freelance sector. This launch is a clear testament to the increasing acceptance of digital payment methods.
• A profound shift towards contactless transactions, sparked by the pandemic, brings with it significant challenges, such as heightened regulatory scrutiny and potential fraud risks. Amidst the digital banking revolution, we continue to see bank branches closing at high rates and ATMs face the threat of becoming obsolete
• The advantages of digital wallets, which include convenience, security, and efficiency, are fuelling their widespread adoption among users and merchants, consequently stimulating innovation in the sector.
• Projections indicate a remarkable surge in the transaction value via digital wallets, potentially hitting $16 trillion by 2028, driven by innovative services like Buy Now Pay Later (BNPL) and microloans.
• Whilst many embrace the shift towards digital payments, others are not convinced. A recent example of this is the public consultation opened by HM Treasury and the Bank of England to pilot a UK Central Bank Digital Currency which received 50,000 responses, many of which did not support the initiative.

PEN Perspective:

Apple's Tap to Pay launch in the UK marks a milestone in the rapidly evolving digital payment landscape. This shift, coupled with the growing popularity of digital wallets, suggests an inevitable move towards a less cash-dependent society. However, issues like fraud prevention and regulatory compliance remain critical. The projected rise in transaction value underscores the immense potential in this space and encourages financial service providers to innovate and expand their offerings.

In Case You Missed It:

• The UK's Financial Conduct Authority has now introduced a permanent Digital Sandbox, providing firms with continuous access to the test pad to experiment with cutting-edge technologies.
• HSBC is relocating from its global headquarters in Canary Wharf to smaller offices in London, as a response to the shift towards hybrid working arrangements and cost-cutting efforts.
• The FCA expect to see a reduction in the number of FOS complaints once the consumer duty regulation comes into force.

Thanks for reading the latest edition of The Current Account. If you're interested in hearing more about any of the topics discussed here, feel free to connect with me on LinkedIn or contact me via our website.

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