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By Caroline Binham
July 9 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling, aiming to prevent another global financial crisis, may be leaving the biggest decisions on U.K. banking regulations to opposition politicians and bureaucrats in Brussels.
Darling yesterday said he will largely keep in place Britain’s financial architecture, introduced by the Labour government in 1997. He rubber stamped proposals Financial Services Authority Chairman Adair Turner made in March tightening bank capital requirements.
“There’s nothing in here to get excited about, and that’s not just a reflection of the lame-duck nature of the current government,” said Darren Fox, a London-based regulatory lawyer at Simmons & Simmons.
Prime Minister Gordon Brown’s ambition to overhaul the regulatory system and prevent a repeat of the crisis that forced the government to take on to take on 1.4 trillion pounds ($2.3 trillion) of liabilities is running into the need to coordinate action with the U.S. and European Union.
Darling’s plan left unanswered is who will wield authority to rein in risky lending and what new rules are needed to contain excesses in a boom. The Treasury won’t move on those until officials consults with other European Union nations and finance ministers from the Group of 20 nations in the autumn.
Election Due
With less than a year before the next election, Britain’s Conservative opposition is leading in polls and setting out its own proposals for a new rulebook. It suggests the Bank of England have the duty to supervise capital and liquidity for banks, building societies and other “significant” firms. The FSA would monitor companies’ conduct.
“One of the first things the Tories will do is to hand prudential supervision to the Bank of England,” said David Berman, a financial services lawyer at London-based Macfarlanes. “The government is taking a wait-and-see approach to see how the EU regulatory framework will pan out.”
In addition, European Union regulators in Brussels are working on an array of proposals, including a “supervisor of supervisors” and rules on credit derivatives and hedge funds.
Darling stopped short of calling for a break-up of the largest banks, or a separation of their deposit-taking and proprietary trading units. Instead, he supported Turner’s calls for banks to hold more capital, including a doubling of shareholder equity.
He also backed Turner’s plan to gather information from hedge funds -- whose managers the FSA already regulates -- to see how important they are to the financial system.
‘Nuclear Option’
“Banks have been moving in the direction of greater regulation anyway,” said Jonathan McMahon, a former FSA supervisor who now advises companies at Promontory Financial Group LLC. “They have all raised capital. They’ve all improved their liquidity. Regulators and politicians worldwide have stopped short of the nuclear option: breaking large banks up.”
International accords on how much more capital banks should store are already being reworked by the Basel Committee on Banking Supervision.
“As to what all the proposals mean if you’re HSBC or Barclays is impossible to say,” said Fox. “It’s dependent on what other regulators come up with, and is a recognition that this is organized on an international, not national basis.”
Tripartite Debate
The Conservatives will dismantle the Tripartite Authority, which oversees the U.K. financial system and consists of the Treasury, the FSA, and the Bank of England, said George Osborne, the Conservative lawmaker who speaks on economic affairs.
Darling said the Tripartite system created by Brown should be kept strengthened through the creation of a Council for Financial Stability.
Like the U.S. and the EU, the stability council is Darling’s first effort to create “macro-prudential supervision,” where regulators try to curb lending excesses in a boom. The panel would oversee risks to the financial system and would be a voice to raise concerns about the industry.
While lawmakers around the globe agree there is a need for such supervision, there is less accord on who will do it.
“This is new wine in dusty bottles,” said Tom O’Riordan, a regulatory lawyer at Paul Hastings LLP. “There are a lot of mirror images of Obama’s regulations in the U.S.”
President Barack Obama’s proposals for the most sweeping overhaul of U.S. financial regulation in 75 years, announced last month, included plans for a systemic-risk council.
New Stability Board
Turner, who also heads the team of the international Financial Stability Board that coordinates worldwide regulators, called macro-prudential supervision “the great cliché of the crisis.” He proposed that Bank of England Governor Mervyn King should lead a systemic-risk board comprised of FSA and bank officials.
Darling said the chancellor would chair such a board. Typical macro-prudential tools include dynamic provisioning, or forcing banks to horde more capital in good times to draw down upon in bad. Turner’s report suggested that banks should be made to keep as much as 3 percent of their total assets at the top of the economic cycle.
“I don’t really think there’s been a turf war,” said McMahon. “There have been some frustrations and uncertainty about responsibilities. But we’re talking about technocrats who are interested in getting the right answers rather than grabbing more power.”
To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net
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