Page last updated at 10:11 GMT, Wednesday, 8 July 2009 11:11 UK

UK set to reform bank regulation

Chancellor Alistair Darling

Live: Statement on banking reform

The UK government is set to announce its plans to reform the financial system to prevent future crises.

But the White Paper will leave many questions unanswered about the role of the key regulators. The Lib Dems say it is unlikely to go far enough.

New powers will be proposed to curb bank lending and prevent asset bubbles, such as the housing boom, undermining the real economy.

The government has put up more than £1 trillion to bail out failing banks.

The aim, according to Chancellor Alistair Darling, is a "significant toughening up of the regulatory system" in order to "learn the lesson of what went wrong... and make sure we reduce those risks".

KEY ISSUES
Who should be the key regulator? The current system shares responsibility between the Bank of England (BoE), the Financial Services Authority and the Treasury. The BoE wants its powers increased
New powers for the BoE or Treasury to control the amount of money banks can lend
Limit on mortgages, pegging borrowing amount to affordability and income
Banks forced to hold more in reserve to shield against losses
Bank bonuses and pay packets tackled
More consumer protection, including possible "risk alerts" for financial products such as mortgages and pensions, similar to the health warnings on food and tobacco

However, many of the detailed proposals in the White Paper will need further discussion with international regulators and the financial services industry, so only a limited number will be included in parliamentary legislation this autumn - leaving the next government to sort out many tricky issues.

Angela Knight, head of the British Bankers' Association, said that the government should move cautiously in order not to make the recession worse.

The government plan will build on the proposals made by Lord Turner, the head of the FSA, in March, and endorsed by the G20 summit in April. The US is expected to introduce broadly similar legislation later this week.

'Running amok'

Vince Cable, Liberal Democrat Treasury spokesman, said he was disappointed with the reforms that are expected in the White Paper.

"The big issue of the day, which I don't think this White Paper will address at all, is that since it took over the banks... the government's let the situation drift," he told the BBC.

There'll be a proposal to give the Bank of England increased formal responsibility for assessing whether financial markets are overheating in a dangerous way
Robert Peston, BBC business editor

"An enormous amount of taxpayers' money's gone in. It's not clear that credit is coming out to perfectly good solvent companies.

"We've still got a credit crisis. The bonus culture is running amok and the government is adopting an entirely passive role through its shareholding body UKFI and that's not good enough."

BBC business editor Robert Peston says the government will endorse the current tripartite system - where responsibility in a financial crisis is shared between the Bank of England, the Financial Services Authority, and the Treasury - but will also give the Bank of England increased responsibility for assessing financial markets.

The governor of the Bank of England, Mervyn King, has said that without increased powers his role is merely to "preach sermons".

However, our correspondent says it is uncertain whether the governor will think he is getting the powers he needs from the Treasury.

The FSA, which currently has the power to declare individual banks insolvent and trigger a government takeover, says it is more important to resolve how banks are regulated than by whom.

One possibility might be to set up a special committee, including both the Bank and the FSA, to look at issues of systemic risk and regulation.

However, if the Conservatives win the next election, they have pledged to give the Bank of England a lead role in financial regulation.

Restricting banks

The key issue in the White Paper will be how to implement the new objective of "macro-prudential" regulation, which aims to ensure that the whole system, and not just individual banks, is prevented from collapse.

FROM THE TODAY PROGRAMME

One approach, which will be endorsed by the White Paper, is to raise the capital requirements of banks so that they have to put aside more of their funds for a rainy day - and also hold more in cash equivalents, to prevent a bank run.

But there will also be a discussion of other ways to prevent risk - such as self-insurance by banks; more open and transparent derivatives markets; and further restrictions on bank lending.

Another important issue that is unlikely to be resolved by the White Paper is whether banks should be allowed to grow so big that they pose a risk to the global financial system.

Last month, Mr King said: "If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big."

But although the crisis has produced a wave of consolidations within banking, it could prove legally and economically difficult to unravel bank mergers.

One possibility would be to tax big banks more heavily, perhaps with some form of windfall tax to cut their profits in good times. Another would be a return to the US-style separation of investment banking and retail banking, as in the Glass-Steagall Act which was repealed in 1999.



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