Financial Regulatory Forum

ANALYSIS-UK bank changes will be outweighed by EU

May 12, 2010

By Huw Jones

LONDON, May 12 (Reuters) – The new British government will make the Bank of England responsible for spotting asset bubbles as part of global efforts to learn from the financial crisis but the new set-up will still be overshadowed by EU centralisation.

The Financial Services Authority will likely remain in some form with a reduced role of making sure firms such as HSBC, Barclays and RBS comply with market rules.

The government will study whether retail and investment banking should be separated and report back within a year with any proposals. It also plans a levy on banks to pay for bailouts.

PART OF WIDER TREND

* Supervisory changes are taking place across the world — in France, Germany, the European Union and the United States — after the financial crisis highlighted fundamental flaws.

* Britain is moving towards a “twin peaks” model whereby supervision is divided between the central bank and a separate regulator that looks at day-to-day compliance with financial laws. This is already triggering relief among lawyers and bankers that duplication of supervisory functions can be avoided. The Netherlands and Australia have adopted twin peaks.

* The Bank of England’s enhanced role may well be overshadowed by the European Central Bank which will host and probably chair a new European Systemic Risk Board from 2011 and will speak directly with all EU finance ministers, diluting Britain’s influence.

* Britain had already begun reforming supervision by formalising its “tripartite system” whereby the FSA, Bank of England and finance ministry work together. This was widely seen as having failed and a new Council for Financial Stability, comprising the same three stakeholders, met for the first time in January.

* Putting the Bank of England in charge of macro-prudential supervision is part of complying with pledges Britain has made globally. The G20 group of leading countries agreed last year its members should set up mechanisms to monitor system-wide risks so that risks are spotted earlier before they harm the economy.

IMPACT AND TIMING

* The UK change could become a distracting shift of old wine back into its original bottle as the Bank was responsible for supervision until the FSA was created a decade ago.

* Hector Sants, the FSA’s chief executive steps down this summer and it may take time for a successor to find his or her feet. He has also warned that no matter what type of supervisory structure emerges, it will increasingly have little choice but to apply rules made elsewhere.

* Bank of England Governor Mervyn King was keen on Wednesday to stress that changes must be carefully thought through, saying the key issue is what regulation does and not who does it.

* The bulk of financial rules applied in Britain are made at EU level and what national wiggle room the FSA had will decrease after 2011 when three new pan-EU authorities to monitor banks, insurers and markets are set up.

Their core aim is to forge common rules that are binding on all member state supervisors, having a direct impact on individual banks, insurers and markets in Britain.

* The regulatory agenda to deal with the crisis has been set globally by the G20 group of leading countries and the new global Financial Stability Board is responsible for ensuring no country seeks to create an unfair advantage for its financial sector.

* The changeover will need to be handled carefully as too much is going on internationally for Britain to be distracted with internal reform.

* The FSA is seen as an effective player in shaping the nitty gritty of financial rulemaking in the EU, and banks worry this will be blunted while the new set-up is put in place.

The EU is in the middle of approving rules that will have a major impact on Britain, the bloc’s biggest financial centre, such as on hedge funds, supervision, derivatives and crisis management.

BREAKING UP BANKS

* Banks will breathe a sigh of relief there are no immediate plans to break them up as the issue has been handed to an independent commission for study.

* The new government plans to push ahead with a levy on banks even though the fact there is no global consensus could leave banks in Britain at a competitive disadvantage if the levy is heavy. (Reporting by Huw Jones, editing by Stephen Nisbet)

((+ 44 207 542 3326; huw.jones@thomsonreuters.com))

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