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Council will aim to fight threats to stability

A Council for Financial Stability bringing together the FSA, Bank of England and Treasury will be set up to monitor financial stability and respond to long-term risks as they emerge.

The reforms were set out in the Treasury White Paper on banking published last week, which also says the FSA will get a new statutory objective for financial stability. Chancellor Alistair Darling said he would extend the FSA’s powers to ensure it can deal with different risks in individual banks, have tougher powers and penalties against misconduct and can expand regu- lation where necessary to meet new market developments.

Darling will chair the Council for Financial Stability which will have regular meetings to discuss systemic risk as well as meetings when risks to financial stability arise. It will intervene to resolve these threats.

But Darling ruled out an overhaul of the tripartite system, saying the FSA and the Bank of England would retain all their existing responsibilities.

He also ruled out breaking up big banks or separating retail banks from investment banks dismissing this as “a simplistic solution”. Banks will have to produce resolution plans proportionate to their size and complexity which will set out a plan of action for if they fail.

Other proposals inc- lude strengthening rules to ensure that banks hold enough capital as a buffer against losses and introducing a back-stop power, ensuring that banks do not overextend themselves by lending too much when they do not have the strength to do so.

CMS Cameron McKenna partner Simon Morris says: “Darling’s announcement of a Council for Financial Stability is old wine in a new skin, merely another way of expressing the existing tripartite authority which has not delivered the stability that is needed.”

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