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Banks which trade in the riskiest kinds of investments may be forced to raise the capital they set aside to cover potential losses by up to five times under plans being discussed by the Financial Services Authority (FSA).
That is far higher than bankers had expected under new international rules to be discussed by the G20 leading economic nations' finance ministers meeting in London tomorrow.
FSA chairman Lord Turner also suggested that he is considering making banks which are deemed to be so large that their collapse would damage the entire financial system increase their capital ratios significantly.
“Should there be a capital surcharge for too-big-to-fail capital institutions? There's a lot of sympathy for that idea,” he told today's Wall Street Journal.
Turner, who came under fire last week for his suggestion that there should be blanket tax on financial transactions, today warned banks they should not automatically expect to pay higher bonuses to employees and bigger dividends to shareholders as they return to profitable growth.
“What we wouldn't like to see is high profit disappearing into high bonus levels and dividend payments when it could be used to more rapidly achieve the sort of capital requirements that we want,” he said.
He said interim rules on UK banks' capital ratios put in place at the height of the banking crisis last November may have to be replaced by a second set of regulations if the Basel Committee on Banking Supervision takes too long to come up with new international minimum capital requirements.
For example, if Basel set new rules for 2015 the FSA could ask profitable banks to hit those standards by 2012. At the moment, plans by the part-nationalised Lloyds Banking Group to raise up to £10 billion in fresh capital are being stress-tested by the FSA under its interim rules. These are set to ensure the bank would survive the recession and escalating bad debt write-downs. By raising extra cash from shareholders Lloyds hopes to cut back its involvement in the Government's expensive asset protection scheme.
The FSA effectively forced Lloyds to take part in the scheme alongside Royal Bank of Scotland last spring because it did not feel the bank had enough capital to cover potential losses.
Lord Turner said the G20 meeting should also look at making the biggest banks create “living wills” explaining how they would wind themselves down in the event they failed.
He said: “Living wills will be a forcing device for the clarification and simplification of legal structures. In the past, authorities around the world have tended to be tolerant of the proliferation of complex legal structures designed to maximise regulatory and tax arbitrage. Now we have to demand clarity of legal structure.”
Reader views (5)
Horse Stable Bolted... ehhhrr duhhhrrr!
1) This was apparent years ago and could have been implememented very easily... just raise capital ratios where banks are being ill disciplined.
2) Get EU, USA & UK to do same.
Step 2) harder granted than step 1) but having fired a warning shoty it is likely that other regulators would have awoken from their post prandial snoozes!
- James Macleod Ritchie, Oyster Bay Cove, 03/09/2009 14:37
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What a waste of time and energy. Asking a company to pay to plan for its own failure???! It is a ridiculous distraction for any company and a waste of capital for investors. This man should be turfed out. he is no good for the country. He should be regulating to prevent these failures. If his agency actually knew what it was talking about and regulated rather than ignored the industry, we might have been in less of a financial pickle than now. there was nothing more galling than to sit at a conference of European regulators a few months ago than to see representative after representative basically saying "Its not my fault". What do we pay them for? And before anyone tells me I don't know what I'm talking about, know that I was made redundant by an investment bank last October and know what it is like to be out of work as a result of the crisis. I'm not defending banks, I'm criticising the regulator.
- Richard, Buckhurst Hill, UK, 03/09/2009 13:23
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Can't wait for an incoming Conservative Government to abolish an almost moribund FSA, and hook-up all compensation procedures to the BOE.
- Ted, London, 03/09/2009 12:11
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A fair idea that Banks that take higher risks should be require to holder greater amounts of funds to meet a crisis. But Lord Turner will need to undertake such a change in concert with other major financial services countries. But the first defence is good due diligence and not being rushed like Sir Fred. Lets step back and think.
- Andrew, London, 03/09/2009 11:47
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Get on with it Turner by turning talk into actions on banks and hedge funds. The vulnerable taxpayer is still waiting to hear what has been implemented to ensure we are never again exposed to such catastrophic levels of risk.
The FSA you chair might as well not have existed to date and has been as socially useless as some of the banks you criticise. So how about producing your own 'living will' for the likely eventuality that your organisation does not deliver fundamental change to the financial sector.
- James, South East, 03/09/2009 10:17
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