ALISTAIR DARLING, the UK chancellor of the exchequer, pledged yesterday to toughen regulation of banks and the financial sector with wide-ranging proposals designed to prevent a repetition of the financial crisis and the failure of several British banks.
He instructed the Financial Services Authority to force banks to hold more capital so that they can absorb losses and have greater liquid assets to guard against a run on deposits, and introduced a “backstop” power to prevent bank borrowing from rising too far.
In a change of practice, the FSA will also impose heavier capital and liquidity standards on those banks that pose the greatest risk to the financial system.
Publishing his White Paper on reform of regulation in the financial services sector, the chancellor said the capital ratios that banks must hold would be based not only on the possibility that an individual bank might fail but on the costs of that failure to the financial system and economy.
This implicit regulatory “tax” could encourage some banks to split into smaller and less risky entities, or shift operations to more lax regulatory regimes.
The government is not seeking to prevent bank failures completely, however. Mr Darling said institutions needed to have “practical resolution plans” so that the authorities could wind them up quickly in the event of collapse.
But the chancellor made clear that he did not favour splitting up big and complex global banks, calling such proposals “simplistic” because risk can move quickly round the system.
Mr Darling sidestepped the row between the Bank of England and FSA over wider regulation but said he would introduce legislation to give the FSA statutory responsibility for financial stability. There would be a Financial Risks Council, comprising both institutions and the Treasury, to monitor emerging risks in the system. Backed by legislation, it would have to respond to the FSA’s and Bank of England’s reports on financial stability, proposing measures to tackle risks.
“The council will draw on the expertise of the FSA and the Bank of England, who are and will remain independent of government, by looking at their regular reports – the Financial Stability Report and Financial Risk Outlook – and formally responding to their recommendations,” he said.
This was the government’s main short-term weapon to stop another credit bubble from building, although Mr Darling said he would also consult on other measures both domestically and internationally.
In a change to Treasury thinking, Mr Darling said he would force banks to pre-fund the Financial Services Compensation Scheme, which provides protection for depositors in the event of a bank failure.
Mr Darling is expected to order clear warnings to be printed on financial documents so that consumers know if they are buying high-risk products, such as a subprime mortgage.
George Osborne, th Conservative party’s shadow chancellor, accused the chancellor of a “totally inadequate response”.
The government refused to recognise the failures inherent in the system of financial regulation between the Treasury, Bank of England and FSA, he said.
Banks largely welcomed the White Paper, saying they recognised the need for reform. However, some called on the government to dovetail stricter financial regulation with the rest of Europe. – ( Copyright The Financial Times Limited 2009 /Reuters)
