Page last updated at 10:01 GMT, Wednesday, 18 March 2009

Curbs on risky banking proposed

Adair Turner
Lord Turner's proposals have been eagerly awaited by many

Proposals aimed at overhauling the rules governing UK banking and stopping a repeat of the financial crisis are to be unveiled by the City watchdog.

Financial Services Authority chairman Lord Turner will put forward new rules on lending and seek to restrict banks' ability to take excessive risks.

The plans will aim to stop banks lending too much during boom years, which may include limits on home loans.

Banks may also be required to build up reserves in healthier economic times.

Speaking ahead of Lord Turner's announcement, business secretary Lord Mandelson said that financial regulation had not "kept pace" with changes in the global economy.

He added that an international regulatory response was required to keep up with the speed of economic change and that a more global focus would have given "warnings" of problems in the system.

'Less trusting'

BBC business editor Robert Peston said Lord Turner would call for banks to be forced to hold more cash or liquid investments, to make them less vulnerable to collapse when other sources of finance dry up.

The report will also recommend that banks publish more and clearer information in their accounts about the risks they are running, he added.

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

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 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."

'Barmy'

Lord Turner has already said his plans will amount to "a revolution".

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A shake-up in the relationship between the FSA, the Bank of England and the Treasury is also set to be proposed.

Paul Moore, the former head of group regulatory risk at HBOS, told the BBC that the bonus culture of investment bankers had encouraged them to take excessive risks in recent years.

"No doubt remuneration drove the growth of assets in an uncontrolled fashion," said Mr Moore, who recently told the Treasury Select Committee that he was sacked for warning the bank about its lending policies.

John Varley, chief executive of Barclays, told the House of Lords economic affairs committee on Tuesday 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.

Lord Mandelson: "Every single government should have done more"

"There was misplaced confidence and we all made mistakes," he added.

Our business editor said that the FSA had been concerned "only with the relatively minor things".

"They did not question whether the banks were behaving in a barmy way," he said.

'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" for not spotting the Rock's "reckless" business plan.

How UK banking regulation works

Other issues likely to be covered in the FSA proposals include:

  • Hedge Funds: Traditionally secretive, these investment groups may be subjected to greater regulation and scrutiny
  • 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.

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 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.

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."



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