New measures to rein UK banks in

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Proposals to overhaul financial regulation in the UK banking sector will be unveiled by the chair of the Financial Services Authority.

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Re: New measures to rein UK banks in

New measures to control UK banks


Lord Turner's proposals have been eagerly awaited by many

Proposals to overhaul financial rules governing the UK banks sector are to be delivered on Wednesday by City watchdog the Financial Services Authority (FSA).
BBC business editor Robert Peston said FSA chairman Lord Adair Turner will unveil proposals to stop banks lending too much during boom years.
Our correspondent also said that Lord Turner will seek to restrict banks' ability to take excessive risks.
And banks will have to lend relative to their assets during any economic cycle.
'Less trusting'
"Also, Turner will say that banks should be forced to hold more cash or liquid investments, to make them less vulnerable to collapse when other sources of finance dry up," said our business editor.

The tragedy, perhaps, is that it's required financial calamity to bring about an outbreak of common sense


BBC business editor Robert Peston



Read more from Robert's blog here

Lord Turner will also recommend that banks publish more and clearer information in their accounts about the risks they're running.
And a proposal to form a new pan-European body will be mooted, to set standards for other regulators to follow.
"Most significantly Lord Turner will repeat his pledge that the FSA will become less trusting that banks are usually doing the right thing; the FSA will abandon the prevailing dogma of the past 30 odd years that the market is always right," said the BBC business editor.
"In a way, little of this is terribly surprising. The tragedy, perhaps, is that it's required financial calamity to bring about an outbreak of common sense."
Financial Services Authority (FSA) head Lord Adair Turner has already said his plans will amount to "a revolution".
A shake-up in the relationship between the FSA, the Bank of England and the Treasury is also set to be proposed.
It comes after John Varley, chief executive of Barclays, told the House of Lords economic affairs committee that responsibility for the banking industry "somewhat fell through the cracks".
"We should take advantage of the calamity of the last two years and ensure we do learn and have in place a structure of supervision to spot these risks," Mr Varley said.
"There was misplaced confidence and we all made mistakes," he added.
'Systematic failure'
Last month, Lord Turner told a Treasury committee that the FSA's failure to spot the banking crisis in advance had been partly due to the style of regulation, with a "light touch" approach seen as politically preferred.
The tripartite arrangement, in which the three authorities have different roles, has been widely blamed for the events which led to the nationalisation of Northern Rock and Bradford & Bingley, and the huge losses at the likes of Royal Bank of Scotland.

The problem for the FSA is that the [banking] industry is global - but the FSA is local


Bob Penn, Allen & Overy

Critics of the system - introduced by then-chancellor Gordon Brown in 1997 - say that regulation had become confused.
This meant that none of the key players fully knew who was overseeing the UK's financial system, meaning that flawed banking models, such as that at Northern Rock, fell through cracks in the regulatory network.
Last year the Treasury committee accused the FSA of "systematic failure" of not spotting the Rock's "reckless" business plan.



Bonuses curbed?
Proposals to advocate tighter regulation of complex banking instruments which led to problems at many banks are also widely expected to be introduced.
So-called "off balance sheet" activities and the use of "special purpose vehicles" had been widely condemned by politicians as being tools that even many of those running them did not fully understand.
Other issues likely to be covered include:

• Hedge Funds: Traditionally secretive, these investment groups may be opened to greater regulation and scrutiny
• Bank reserves: Looking at whether banks should be expected to hold certain amounts of capital - and to build up reserves in healthier economic times
• Bonuses: The FSA has made it clear it wants to curb the culture of excessive bonuses for short-term gains which have seen bankers at failing banks earn, in some cases, millions of pounds in bonuses
• Mortgages: Some lenders have been accused of having made too much money available to people through 100% or even 125% mortgages - artificially inflating the housing market. Reports say limits may be placed on how much can be made available to would-be home buyers.

'Stringent'
But Bob Penn, partner at law firm Allen & Overy, said there was a danger that greater regulation would result in international banks "drifting" away from London to "less regulated jurisdictions".

The whole point is that systemic regulation will involve difficult and unpopular choices


Simon Morris, CMS Cameron McKenna

This meant that nations needed to act together to insist on more stringent regulation, he added.
"The FSA is caught between two masters at this stage - the political imperative to put the boot into the banks on the one hand, and the need for London to continue to be an attractive place for international finance on the other," he said.
"The problem for the FSA is that the industry is global - but the FSA is local. This circle can only be squared by international agreement on the future of the regulation of wholesale markets."
Simon Morris, from law firm CMS Cameron McKenna, said the new focus of banking regulation had to be on identifying systemic risk at banks and authorities being able to legally intervene.
"The whole point is that systemic regulation will involve difficult and unpopular choices," he said.
"Neither the Bank of England nor FSA really has the legal basis to intervene on systemic grounds, for example to tell a large bank not to expand further."
The prospect of regulation of the mortgage market was not a solution to the threat of future house price inflation, the House Builders Federation (HBF) said.
"If the FSA and government go down the route of mortgage control to try to head off future asset bubbles they are likely to entrench and worsen future housing under-supply that is rooted in the constraint of land supply," said the HBF's executive chairman Stewart Baseley.
"House price booms are caused by an imbalance between supply and demand and the long term solution to escalating prices is to ensure there are enough homes to meet demand - not to impose regulation that takes no account of personal circumstance or risk that could discriminate against people perfectly able to realise their ambitions of home ownership.
"We are cleaning the car window when the petrol tank has a hole in it."