More regulation for banks in the UK

The chairman of the Financial Services Authority in the United Kingdom (FSA), Lord Turner, said in an interview last Wednesday that before the crisis, the FSA’s approach was based on the logic that markets correct themselves. However, after the collapse of few big banks, the FSA will use more regulation to tackle the problems of the financial sector, instead of leaving it to fix itself. Lord Turner proposed a move to a philosophy of ‘intense supervision’. He didn’t go into details about how exactly they are going to achieve it, but it looks like the new regime will be costly. Some examples for future regulation might be that banks will be required to hold more and higher-quality capital. Banks could also be required to build up their capital buffers in good times. The FSA also thinks that bank liquidity should be monitored closely using a liquidity ratio. Lord Turner even proposed a new European institution with legal powers to be created, but this may cause more problems and difficulties than help.
The news was reported in the Investment Chronicle. Except the statements made by Lord Turner, they also analysed what he have said and the measures which might be taken in the future. However, on this early stage it is hard to predict the exact details and the steps which the FSA will take.
The magazine also provided arguments for and against the plan of the FSA, which helps people to judge the current situation better, rather than imposing them a one-sided argument. The positive comment was made by Laura Cox, partner in PricewaterhouseCoopers. She said that only changes in the rules will not be enough. The FSA will have to change its own culture and supervisory approach in order to deal with systematic risks in the future. There are a number of measures which can prevent another financial crisis in the future. Some examples are an early warning system to identify banks in trouble, better crisis management procedures, restrictions on lending and the requirement for banks to build up reserves. The changes will have a huge impact on the business models of the banks and will influence their directors’ and senior executives’ responsibilities, their governance structures, their compliance functions and products offerings. Laura Cox thinks that the Lord Turner’s Report is a way forward but it shouldn’t stay in the way of the banking industry’s product innovation.
The comments from the negative side of the argument were made by Dr Eamonn Butler, director of the Adam Smith Institute. He argues that even though at the moment higher reserve requirements seem like the right think do to, it means that banks will have to cut back their loans, which right now would be a disaster. It doesn’t matter how much banks loan as long as they have‘insurance’ and the government should provide this insurance. However, the government have failed to do this when customers all wanted their money back at once.
Dr Eamonn Butler says that by imposing that kind of regulation will only shift risk higher up rather than eliminate it, because most banks will remain dependent on credit from investment banks. His opinion is that there should be more small banks, not fewer bigger ones, to spread the risk. The real threat to investors, savers and the economy are banks ‘too big to fail’ and incompetent regulators.