BoE warns banks against using tricks to dodge regulations

The Bank of England has warned lenders against using balance sheet trickery and other “innovation” to “circumvent the spirit” of regulation aimed at preventing another financial crisis.

Sam Woods, chief executive of the BoE’s Prudential Regulation Authority, said in a speech on Monday that some of the evolving funding and borrowing practices are “pure regulatory arbitrage” and warned that firms “should expect questions and should be prepared to defend them”.

In his presentation at the annual Building Society Association conference, Mr Woods pointed out that some of these practices include banks’ use of special purpose vehicles and other structures to escape certain capital requirements.

He also highlighted that some banks are “seeking out funding that matures just beyond the time horizon used to calculate regulatory liquidity requirements.”

His comments come after his speech last October about the near-completion of regulation aimed at preventing another rerun of the 2008 global financial crisis. Key to this regulation is the upcoming ringfencing rules that require banks with more than £25bn of deposits to hive off their retail banking activities from riskier investment banking units by 2019.

But Mr Woods is urging the industry to remain vigilant as the new framework takes root, to prevent some firms from attempting to reduce regulatory requirements without mitigating the risk.

He added: “Firms should continue to expect alert supervisors who have their ‘eyes peeled’, their ‘ears to the ground’ – and who ‘can smell when something is off’.”