The British Bankers’ Association (BBA) has warned that customers' ability to switch bank accounts at the touch of a button increases the likelihood of a run on a bank.
In 2007 when large numbers of customers of Northern Rock withdrew money following fears that the firm was in trouble, there was what is known as a run on the bank, which led to it needing an emergency government loan to continue to operate.
According to the Financial Times Anthony Browne, head of the British Bankers’ Association, said regulators are considering a means of preventing the possibility by having a brake-like mechanism that kicks in when withdrawals reach a certain level.
Although a seven-day account switching system is now in place, regulators are considering proposals that will enable consumers to change bank accounts immediately while retaining the same account number. This will increase the chance of large sums of money being removed from banks very quickly, putting the bank at risk of running out of money and breaching solvency rules.
Read more about the run on Northern Rock
- Northern Rock was forced to take an emergency loan from Bank of England to prevent it breaching solvency rules in September 2007when it was one of the first casualties of the sub-prime mortgage crisis.
- Many customers of Northern Rock were unable to get reassurance from the company's website during last week's crisis when it was forced to get an emergency loan from the Bank of England to prevent it breaching solvency rules.
- The early signs of trouble brewing in the financial sector emerged when Northern Rock was rescued by the government after it ran out of money. A year later, investment banking giant Lehman Brothers went into administration.
Danger of customers moving money
Browne said: "Regulators need to be aware of the risk that the ability to withdraw money quickly and move it somewhere else could make a run on a bank more likely.”
New financial service providers including new banks are being set up and approved by regulators. These companies offer often niche services and threaten to eat into the business of the large banks that offer full banking services.
Recent months have seen a spate of new banks granted licences, with others going through the process of getting approval.
When Metro Bank opened its doors – in 2010 – it was the first company to be granted a banking licence in 150 years.
IT differentiates banks' propositions
One of the forces behind Metro Bank, Anthony Thomson, is launching a digital bank called Atom. His recent comments – that the bank will use its low costs to offer consumers higher interest rates on savings and lower borrowing rates – could be the key to success in a sector dominated by giants such as RBS, HSBC, Lloyds Banking Group and Barclays. (Computer Weekly looks at six of these challenger banks and their use of IT to differentiate their business propositions.)
Technology companies have also started challenging banks in areas such as information enrichment, payments and offering peer-to-peer lending. (Click here to read about six IT companies that shaking up retail banking.)
One banking source told Computer weekly that, in the future, consumers are likely to buy financial products from a multitude of different providers including banks and technology companies.