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New measures to control UK banks New measures to control UK banks
(about 2 hours later)
Proposals to overhaul financial rules governing the UK banks sector are to be delivered on Wednesday by City watchdog the Financial Services Authority (FSA). Proposals to overhaul financial rules governing the UK banking sector are to be delivered later 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.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.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.And banks will have to lend relative to their assets during any economic cycle.
'Less trusting''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. "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 class="" href="http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/03/fsas_blueprint_to_make_banking.html">Read more from Robert's blog here
The tragedy, perhaps, is that it's required financial calamity to bring about an outbreak of common sense BBC business editor Robert Peston class="" href="http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/03/fsas_blueprint_to_make_banking.html">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 are running.
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.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. "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 our correspondent.
"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.""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". Lord 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.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".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."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."There was misplaced confidence and we all made mistakes," he added.
'Systematic failure''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.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 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
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.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.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. Last year the Treasury committee accused the FSA of "systematic failure" for not spotting the Rock's "reckless" business plan.
Bonuses curbed?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.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.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.
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''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". 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
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.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 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.""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.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."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.""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.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. "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. "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.""We are cleaning the car window when the petrol tank has a hole in it."