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Big firms face tough checks

Chancellor Alistair Darling plans to impose enhanced prudential regulation and stronger capital requirements on large and complex financial organisations.

Firms will be subject to more regulation, including higher capital requirements, with the FSA determining the level of capital by working out the potential cost as well as the likelihood of failure.

It says: “The capital requirements in place for systemically significant institutions would need to be sufficient to change incentives of banks to over-indulge in risky activities throughout the economic cycle.

“This should encourage them to reduce or at least better understand the riskier activities they undertake (for example, proprietary trading) and reduce the moral hazard problem by removing the incentive for firms to become systemically significant.”

Association of British Insurers director general Stephen Haddrill says: “We think improved calibrated capital requirements based on the activities of banks, coupled with better application of competition rules, would be a better way of addressing banks that are considered ‘too big to fail’ than splitting them up.”

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