Britain will propose next week that more complicated banks should hold extra capital to minimise the cost to the taxpayer if they go bust, a source familiar with a Treasury paper on the subject told Reuters. The Treasury is set to publish a paper next Wednesday setting out its thinking on the next steps in financial regulation, the source said on Wednesday, following the worst international banking crisis in living memory.
The government has been forced to spend billions of pounds to bail out the country's banks, making it the largest shareholder in lenders including Lloyds Banking Group Plc and Royal Bank of Scotland Plc.
Finance minister Alistair Darling said last week banks could not carry on acting the way they had been. "The paper looks at the Special Resolution Regime and banks that are considered to big to fail," the source told Reuters on Wednesday. "Banks should have capital and liquidity requirements that match the complexity of the institution." The paper also proposes supervisors should be satisfied that banks in trouble can be unwound in a way that protects investors and depositors.
"If a supervisor is not satisfied with a particular business model, they can institute changes," the source said. The main concern would be to ensure that if the bank were to go bust it could be easily wound down with minimum cost to the taxpayer. Retail deposits, for example, should be easily transferrable. Such measures would not require any new legislation and could be enforced using existing laws, the source added.
British banks are already bracing for a future of lower returns in which they have to amass more capital and reduce leverage, as regulators attempt to curb the high-risk business practices that brought the industry to its knees. But industry participants say the impact on the industry is hard to gauge. "Until you see details, it's hard to know what the impact is going to be," said one industry insider.
Bank of England Governor Mervyn King said last week that if banks were considered too big to fail, they were simply too big and suggested retail and investment banks might have to be separated. But the Treasury proposals look unlikely to give any set definition of banks being too big or to suggest an enforced separation of investment and retail banking, as was practised in the United States until 1998 under the Glass-Steagal Act.
"We have learnt that you don't necessarily need to be a big bank, or indeed a complex one, to threaten to bring the system down," Darling said last week. The paper is also likely to call for tighter regulation not just for banks but for any institutions with the potential to destabilise the financial system - giant insurers, for example.
The source said the paper would open a debate on "macro-prudential" regulation where the authorities look not just at one bank but what the aggregate of the sector's activities could mean for the system as a whole. It will also back keeping Britain's current tri-partite regulatory system, under which responsibility for supervision is shared by the Treasury, the Bank of England and the Financial Services Authority.
King has repeatedly called for greater powers for the BoE but the Treasury is unlikely to budge. "Institutions are important ... But to concentrate only on institutions is to miss the point. At its heart, this is about judgements - making the right call at the right time. Whatever the system, judgements will matter," Darling said last week.
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