The FSA’s crackdown on the banking sector is likely to trigger a fundamental shift in banks’ business models.
In last week’s Turner review, the FSA laid down tough new regulatory requirements for the banking sector, signalling a shift away from its previous light-touch approach.
The review sets out plans for banks to hold capital three times above the current level and also for assets to be of higher quality. This is an attempt to protect banks’ balance sheets against future downturns and to stop over-leveraging of balance sheets.
The regulator is also demanding counter-cyclical capital buf-fers, which will require banks to build up capital in good economic times so they can be drawn on in downturns. These should be reflected in published account estimates of potential future losses.
PricewaterhouseCoopers partner Graham O’Connell says the new approach to liquidity and capital will challenge many existing business models.
He says: “The proposed changes are likely to put more pressure on financial institutions at a time when they are already battling with issues such as lack of liquidity, unprecedented losses, difficult trading conditions and battered consumer and investor confidence.
“Many institutions will be forced to re-evaluate the viability of their business models and evolve to adjust to the proposed changes.”
Beachcroft Regulatory Consulting managing director Richard Hobbs says the regulator’s proposals may go too far in trying to correct the problems in the banking sector. He says: “There is political mileage in the FSA putting its jackboots on and throwing its weight around. To get the changes that the sector needs we will end up with proposals that are over-prescriptive.”
But British Bankers’ Association chief executive Angela Knight says the plans put the FSA at the forefront of the international agenda on strengthening and stabilising the global financial system.
She says: “The key to getting this right is the interaction of capital, of liquidity and of managing risk effectively. As always, the detailed discussions which will flow from this report are going to be vital, as we need to ensure that the new framework is appropriate for small banks as well as the larger institutions and the UK retains its attractiveness for foreign banks.”