UK bird flu exercise shows financial service risks

LONDON, Jan 5 (Reuters) A bird-flu pandemic would force waves of retail bank branch closures in Britain and sharp cutbacks in investment banks' trading activity, UK financial regulators said.

The regulators published the findings yesterday in a report on the results of a bird-flu pandemic exercise they ran over a six week period in October and November last year.

''The exercise presented them (the financial services firms) with a genuine challenge which has already prompted many of them to make adjustments to their business continuity plans,'' the regulators said.

It was designed to test how banks, insurers, exchanges, traders and other financial infrastructure providers in the City of London financial services sector would cope in a bird flu crisis.

The simulated pandemic broke out in southeast Asia and spread to Europe and around the rest of the world, causing absenteeism and transport disruptions.

The H5N1 avian flu virus mostly affects birds, but it can occasionally infect people. Experts say there is a danger the virus will mutate into a form that people can easily catch and pass to one another, triggering a pandemic.

The regulators said the heaviest impact of the simulated pandemic was naturally on the more labour-intensive parts of the industry, such as retail banks.

''Although no overall cash shortage emerged during the exercise, there were bottlenecks,'' they said. ''In addition, growing staff shortages forced the high street banks to close an increasing number of branches.'' Investment banks had to reduce trading volumes because of staff shortages.

''Proprietary activity was sharply cut back as firms concentrated their resources on fulfilling customer-driven business.'' As a result, some of the banks are now keen to discuss practical and operational difficulties they faced during the exercise in relation to credit and liquidity risks.

During the exercise, the level of absenteeism rose from 15 per cent initially to a peak of 49 percent.

This put firms' personnel management systems under stress and forced them to examine a whole range of policies such as repatriation of staff from overseas, quarantine rules, absence due to caring for children following closure of schools and creches and so on.

Some 70 financial services organisations and around 3,500 people took part in the simulation that ran from October 13 to Novenber 24.

The Financial Services Authority, the Bank of England and the Treasury, which organised the exercise, now plan to hold a series of workshops and seminars this year on issues raised by the simulation, including coordination of cross-border regulatory responses.

These three routinely cooperate on business continuity planning for incidents that could cause major disruptions to the City of London financial services industry.

Their continuity systems were put into action after the suicide bomb attacks on London's transport system in July 2005.

REUTERS MQA RAI0918