By Gonzalo Vina
July 8 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling said he’ll give the Financial Services Authority and Bank of England more powers over U.K. banks and curtail risky practices that triggered the worst recession in a generation.
The Treasury also will propose increasing competition among banks by bolstering mutual lenders owned by their customers. It will force the industry to pay a levy funding education for consumers about how to manage their money. It will require banks to limit executive pay and improve the caliber of directors.
The measures are aimed at preventing a repeat of the turmoil in markets that forced the U.K. to take on 1.4 trillion pounds ($2.3 billion) of liabilities and controlling stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. Darling has coordinated his proposals with President Barack Obama’s administration in the U.S.
“The world economy has been hit by a severe financial crisis,” Darling said in a statement to Parliament in London today. “Its origins lie in failures in the banking system around the world. Irresponsible pay practices made banks take unnecessary risks.”
Darling said he’s adopting all the recommendations made in March by FSA Chairman Adair Turner, who called for a “revolution” in the way the industry is governed. Those plans include requiring banks to hold more capital and hedge funds to be more open with regulators. Turner suggested banks write mortgages for no more than the value of the homes against which they’re secured, though Darling didn’t mention that today.
Questions Outstanding
The chancellor’s comments brushed over the specifics of exactly what levers the government will develop to rein in the most risky lending practices, saying he will consult finance ministers from the Group of 20 nations on more detailed plans.
“I suspect this paper will be greeted with a great sigh of relief,” said Vince Cable, a lawmaker from the Liberal Democrat opposition who speaks on finance. “It is yet another indication that we are getting back to business as usual.”
Those proposals already have attracted criticism. The British Bankers’ Association has said the plan to reorganize units to lower risk may lead some lenders to relocate abroad. Today, the lobby group welcomed Darling’s proposals and said it would work with ministers on the details.
Industry View
“Banks recognise the need for change and will continue to work positively with all the relevant authorities to ensure the long term success of the U.K. economy and the banking sector,” BBA Chief Executive Angela Knight said in a statement.
Parliament will start work on drafting laws to implement Darling’s plan after its summer recess ends in October. The Treasury issued a draft of proposed legislation today.
Darling brushed over exactly what he plans to do to rein in executive pay at banks, saying he’d develop specific proposals after reviewing a report by David Walker, a senior adviser at Morgan Stanley. He issues his proposals next week.
“We need a change of culture in the banks and their boardrooms, with pay practices that are focused on long-term stability and not short-term profit,” Darling said, adding that he will ask the FSA to report annually on the issue. “Boards and institutional investors must become better equipped, with more effective risk management and greater independence of non- executives who must not be afraid to ask searching questions.”
Bank Supervision
At a less-developed stage are proposals for “macro- prudential supervision” of banks, which aim to limit lending excesses during a boom and strengthen institutions during a slump. Darling said there’s no consensus yet on what tools are required to “lean against the wind,” although central bankers probably will have the most important role to play.
“The principle of leaning against the cycle is easy to agree,” Darling said. “Deciding what action to take, and when, is far more complex.”
George Osborne, the lawmaker for Britain’s Conservative opposition who speaks on finance, said it was a concern that Darling hasn’t yet cleared up whether the central bank or FSA will have the decisive role in keeping banks out of trouble.
“Institutional jealousies and blurred lines of responsibility means everyone gets involved but no one gets in charge,” Osborne said in Parliament. “The Labour Party wants to stick with the financial system that failed us, that they created.”
Big Banks Preserved
Darling also rejected the case for splitting up the biggest institutions to protect retail depositors from the risks of investment banking. Instead, he said authorities will require banks to have in place detailed plans to unwind their businesses in the event they fail or go bankrupt.
“The FSA and the Bank of England will make institutions put in place practical resolution plans which can be deployed in the event they get into difficulties,” Darling said.
The FSA will get a new statutory duty to preserve the financial stability of the economy and extended power to develop the rules it thinks are needed to oversee banks. It will have tougher powers to impose penalties against misconduct, though Darling didn’t say exactly what those will be.
“Darling did not say that much,” said Thomas Kirchmaier, professor of management at the London School of Economics. “I would have liked more concrete proposals on competition and how to improve the supervisory framework. It looks like the old times with slightly revised terms.”
G-20 Talks
British officials will consult G-20 nations later this year when the organization’s finance ministers meet in London, and at that time Darling will unveil proposals to take big banks into custody when they run into trouble. He also wants tighter standards for the derivatives market to keep problems there from spreading.
The Bank of England, FSA and Treasury each will contribute officials to a new Financial Stability Council aimed at monitoring risks to the economy.
“Financial institutions in many countries took on too much risk,” Darling said. “They became over-reliant on wholesale funding, too exposed to particular products. Some financial institutions had little appreciation of what was going on inside their businesses.”
To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net.
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