Britain to unveil banking reform blueprint

July 7, 2009

    By Christina Fincher and Huw Jones
   LONDON, July 8 (Reuters) – Britain is to set out its blueprint for beefing up financial regulation later on Wednesday in a bid to prevent a re-run of the crisis that forced it to bail out banks with billions of pounds of taxpayers’ money.
   The revamp is almost certain to include heavier capital and liquidity requirements, putting pressure on banks’ profit margins, as well as tighter scrutiny over remuneration. Critics say heavy requirements will make it harder for banks to lend to companies and help the economy revive.
   It is not expected to radically overhaul the tripartite supervisory system that failed to spot the risky behaviour two years ago that led to a near-collapse in the financial system.
   The government’s proposals follow recommendations made by Financial Services Authority Chairman Adair Turner in his report on the crisis in March.  Following is a discussion of the plan’s likely shape and prospects:

   — There will be attempts to improve how the tripartite supervisory system, made up of the Bank of England, the Treasury and the FSA, works and takes decisions in a crisis. The government has said it will give more powers to the BoE and to the FSA.
   — Riskier activities at banks will be ringfenced with higher capital charges as part of efforts to keep people’s deposits safe and avoid more government bailouts.
   — No mandatory carve up of different types of banking activities are expected.
   — The government is likely to endorse plans for banks to build up capital buffers in the good times to provide a cushion when things get rough.
   — There could be higher trading book capital requirements.
   The Turner review recommended banks hold a minimum core tier one capital ratio of 7 percent, well above the current global guidelines of 4 percent. Tier 1 capital is already around 8 to 12 percent at many banks as they opt to be ultra cautious.
   The FSA is already planning an overhaul of liquidity buffers which will force banks in Britain from October to hold a higher proportion of highly-liquid assets, such as government bonds.
   The government will say changes in corporate governance at banks are crucial, but will await the outcome of the Walker review into this issue this year.
   No. Parts of the Treasury paper are simply aimed at launching a debate rather than immediate policy action but some actions could be implemented quickly under existing UK law.
   Britain will have to keep an eye on developments elsewhere to avoid its banks being at a disadvantage. The EU is adopting laws to increase bank capital levels but they won’t take effect for another year or more.
   Global regulators are also working on liquidity and trading book issues that will directly affect Britain.
   Even specific proposals that are implemented in Britain early could be ditched. The opposition Conservative Party — widely tipped to win an election due within a year — wants to give the Bank of England the lead say in banking supervision.

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