Thursday, July 9, 2009

New panel proposed to police British banks

Updated on : Thursday, July 09, 2009

LONDON: Britain’s chancellor of the Exchequer, Alistair Darling, presented long-awaited plans for new financial regulations to the Parliament on Wednesday, but sidestepped a turf battle between the Bank of England and the Financial Services Authority and put off any limits on executive pay.

The central bank governor, Mervyn King, had been hoping for more regulatory powers over banks, complaining as recently as last month that his institution could warn of risks in the financial system but had no powers to act if such warnings went unheeded.

Instead, Mr. Darling announced the creation of a new council that would include the Treasury, the Bank of England and the financial regulator, the F.S.A., to deal with risks in the market and at specific institutions as they emerge.

“It is not about which institution does what but to ensure that the system is efficient,” Mr. Darling said in presenting the plans, which he said were meant to “inspire trust on the part of businesses and consumers” and “to provide effective mechanisms to deal with failures if they occur.”

Britain is facing general elections within the next 12 months, which might render Wednesday’s draft legislation irrelevant should the Labor Party of Prime Minister Gordon Brown be defeated.

The opposition Conservative Party, which currently leads in the polls, has repeatedly called for an end to the tripartite system of financial supervision that was set up in 1997 by Mr. Brown when he was chancellor. The goal then was to split the responsibility for maintaining a healthy financial system among the Treasury, the Bank of England and the F.S.A.

George Osborne, the Conservative party’s candidate for the post of chancellor, criticized Mr. Darling’s draft legislation as “totally inadequate.”

“It’s a white flag rather than a white paper,” Mr. Osborne said. “Every question is left for the next government.”

He said the Bank of England should be given more powers because “you cannot separate central banking from the stability of the system.” In addition, he called for “a powerful regulator to protect the consumer.”

Andrew Clare, a professor at Cass Business School in London and a former senior research manager at the Bank of England, said it was unclear which approach would be best. “Giving more powers to any institution may not be necessary,” Mr. Clare said. “They just need to use the ones they have more appropriately.”

Like the United States, Britain is seeking a regulatory framework that would monitor the stability of individual companies as well as that of the financial system as a whole. On Wednesday, Mr. Darling reiterated the importance of coordinating efforts to develop efficient regulation across borders.

Mr. Darling also plans to limit executive remuneration packages and ask the F.S.A. to report once a year on whether financial institutions are sticking to the new rules. Mr. Darling said he would wait for the publication of a report on remuneration by Sir David Walker, due next week, before announcing specific plans. He reiterated that “the culture in boardrooms” would have to change alongside the compensation practices.

Mr. Darling endorsed recommendations made in March by Adair Turner, chairman of the F.S.A., that would force banks to hold more capital as a buffer for potential losses. The Bank of England and the F.S.A. would ask financial institutions to put together an emergency plan to facilitate an orderly winding down of their operation should they get into trouble, said Mr. Darling.

Some hedge funds and other investment funds would be required to hand over more information to the F.S.A. and the regulator would also be responsible for educating consumers about how to save or invest, a program that would be financed with a levy from the industry.

Mr. Darling said that restraining the size of banks to improve stability of the financial system would be a “simplistic solution” because “even small banks can affect stability.” In contrast, Mr. King said last month that if banks were too big to fail, they were too big.

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