The regulator has today issued a discussion paper on policy measures to address systemically important “too-big-to-fail” banks.
It says global groups must operate with the understanding that home country authorities will not be responsible for the rescue of entire groups that fail.
The discussion paper says action should be taken to reduce inter-connectedness in wholesale trading markets, with much over-the-counter derivative trading moved to central counterparties.
It also calls for effective collateral and margin call arrangements for bilateral trades, which reduce the dangers of strongly pro-cyclical margin call effects.
The FSA says reform to trading book capital should significantly increase capital requirements and differentiate more strongly between basic market making functions which support customer service and riskier trading activities.
It also wants to see systemically important banks produce living wills that set out how operations would be resolved.
FSA chairman Lord Turner says: “The direction of travel is clear – the overall level of capital required in the banking system must be significantly increased over time, while liquidity standards must be significantly tightened. These changes are required to create a more stable financial system for the long-term. The challenge now is to determine the precise long-term objective and the appropriate transition path.
“Meanwhile, the FSA has to reduce the danger that authorities in future will be faced with only one option – using public funds to rescue whole groups with only equity holders suffering loss. And we must also limit the extent to which implicit government guarantees support unnecessary levels of risky proprietary trading. The way to achieve this is likely to be a number of mutually reinforcing policies, not a single silver bullet.”