British banks will have to hold more capital and keep more liquid funds on hand to staunch a run like that which grounded Northern Rock, under plans spelled out by Chancellor Alistair Darling yesterday.
Those deemed by the Financial Services Authority to be running the greatest risks will be required have to have more capital than others.
But the Chancellor rejected pleas to separate straightforward high street banks from those engaged in complex, “casino-style” global investment banking.
Presenting a Treasury white paper on financial regulation, he told the Commons such proposals were “simplistic” because retail banks have crashed as well as investment banks.
He side-stepped the turf war between the Bank of England and FSA about which should regulate the banks. He plans to beef up the present tripartite system, involving both, along with the Treasury.
They will be linked in a new, statutory, Council for Financial Stability to monitor risks and threats to stability. It will publish minutes of its meetings.
Pre-election legislation this autumn, though will concentrate on consumer protection and education – to be funded by financial services companies.
This will include a bigger role for the existing Financial Services Compensation Scheme, which banks will have to fund in advance. At present, they pay in money as it is needed to meet claims.
The FSA will have to report every year on how banks and other financial institutions are complying with a new code of practice on pay – and how it is dealing with those that don’t.
“Bank boards and institutional investors must also become better equipped to do the job and understand their businesses, with more effective risk management and greater independence of non-executives – who must not be afraid to ask searching questions,” the Chancellor said. “Our central objective must be to ensure that – as we come through the downturn – we reform and strengthen our financial system and rebuild it for the future, with consumers that are better informed, financial institutions that are better managed and markets that are better regulated.”
Angela Knight, chief executive of the British Bankers’ Association, said: “Appropriate and effective regulation, capital applied according to risk and good quality supervision are the cornerstones of a vibrant banking community.
“We welcome moves to create better co-ordinated financial stability jointly with the FSA and the Bank of England.
“Banking is a global business and reform needs to be thoughtfully handled so moves in the UK dovetail with those overseas ensuring that the UK sector remains competitive, otherwise banking could move away.”
Barclays said it would be working to understand the implications of the white paper.
“Barclays recognises and fully acknowledges the need for governments and regulators to look at reforms to the regulation of the financial services sector,” a spokesman added.
“We have been clear for some time that this would likely involve changes in the capital and liquidity regimes for banks. We are wholly committed to playing our part in the process.”
But the CBI’s director general, Richard Lambert, described the plan to pre-fund the Financial Services Compensation Scheme as “misguided”.
“The first priority for banks must be to rebuild their own balance sheets,” he said. “Pre-funding of the deposit guarantee scheme from 2012 will hamper this. It is also an inefficient use of capital and will be bad for the economy at a time when banks should be lending to businesses so that they can take advantage of economic recovery.”