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FSA raises price of being too big to fail

The FSA says banks that are systemically important on an international scale may have to hold extra capital and global banking groups must ensure that national subsidiaries are sustainable.

The regulator last week issued a discussion paper on policy measures to address systemically important “too big to fail” banks, ahead of the Turner review conference on November 2.

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 cap- ital 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 to set out how operations would be resolved in a collapse.

It says it is still considering whether integrated groups need to separate retail deposit-taking business from trading activities.

It says one possible approach is to lower the capital surcharge for systemically important banks that ensure there is clear legal separation of activities.

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.”
Ashurst partner James Perry says the FSA’s view on too big to fail banks is “predictable”.

“The FSA has been trailing these proposals for a long time. It does not want to introduce any surprises because bad surprises are not good for fragile markets.”

Richard Hobbs, Beachcroft Regulatory Consulting

He says: “Mervyn King may like the intellectual clarity of separating the utility from the casino but the FSA knows that higher capital is the only solution that will fly internationally.

“The proposals on living wills look very preliminary. The really complicated issues such as special purpose vehicles, IT and interconnection between businesses, are left for another day. The industry will not like the sting in the tail, which is that the FSA might make a bank sell or demerge bits of itself if the living will is not up to scratch.”

Beachcroft Regulatory Consulting managing director Richard Hobbs says little in the discussion paper should come as news to the sector.
He says: “The FSA has been trailing these proposals for a long time. It does not want to introduce any surprises because bad surprises are not good for fragile markets.”

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  1. The Mystery Shopper for IFAs 3rd November 2009 at 4:54 pm

    This is the Pot calling the Kettle Black again. Hence the FSA being a failure as there are tooooooooo many staff members running around like headless chickens wasting our money. Over 4000 staff to run financial services in the UK, are we having a laugh? That’s what Madoff said about the SEC the American regulator.

    Slim down your staff by about 80% and you may get focused on what regulations are about and then you may move away from being a gray train!!!

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