U.K. Banks Face New Regulatory Proposals From FSA’s Turner

By Caroline Binham

Oct. 22 (Bloomberg) -- The U.K.’s largest banks will face a second wave of proposals that may lead to a “revolution” in their business with today’s publication of a Financial Services Authority report on firms deemed too big to fail.

FSA Chairman Adair Turner will publish his second report in seven months on changes that he said would revolutionize regulation following the worst financial crisis since World War II. His proposals may include higher taxes or tougher capital rules for big banks in an attempt to lessen the burden on taxpayers in any future bailouts, he has said.

“To what extent can banks have cross-border business in the same way that they used to -- that is bound to come up,” said Jonathan Herbst, a former FSA attorney who is now a regulatory lawyer at London-based Norton Rose LLP.

Policymakers worldwide agree on the need for oversight of firms whose failure might threaten the stability of the financial system. They differ on what to do. Bank of England Governor Mervyn King this week repeated his backing for a plan to split banks’ deposit-taking parts from their securities units. Turner, 54, has previously said that enforcing such a split would be difficult and impractical.

“In the end, the danger will be having too many divergent decisions or no decision at all,” said Tommaso Padoa-Schioppa, the former Italian finance minister who is now European chairman of Promontory Group. “I’m less opinionated on what formula should prevail.”

‘Tax on Size’

The FSA confirmed the report’s publication today. Turner’s March proposals to require banks to hold more capital and liquid assets were largely endorsed by the U.K. government and the Group of 20 Nations. Turner also heads a committee of the Financial Stability Board, a group of finance ministers, central bankers and regulators that guides G20 policy.

Turner said last month that the FSA was considering whether a “tax on size” for systemically important firms would be appropriate, citing proposals by U.S. Treasury Secretary Timothy Geithner.

Turner also backed King’s call for lenders to formulate a “living will” that would set out how they could be split up in the event of failure. Since then, Chancellor of the Exchequer Alistair Darling has said he will introduce legislation on the issue.

The FSA is fighting for its political survival after opposition Conservatives said they would scrap the agency and return lender supervision to the Bank of England should they win the next election, which must be held by mid-2010.

“What will be interesting is if he references U.K. political change,’ Herbst said of Turner.

‘Force for Good’

Since his March report, Turner has attracted criticism for telling banks that they should put social usefulness above profitability and for suggesting a global tax on bank deals. He repeated those two themes this week.

Turner could propose a ban on so-called naked trading of credit-default swaps, the British Broadcasting Corporation reported, without saying where it got the information. The swaps, a form of credit derivative, allow buyers to guard against a borrower’s missed debt payments.

The BBC said Turner may look at limiting CDS to only those who hold the debt of a particular company or institution. Turner said last month that some products were so complex in the $592 trillion over-the-counter derivatives market that it was unclear how they benefited society.

“I’m predicting activist regulation,” said Simon Gleeson, a regulatory lawyer at London-based Clifford Chance LLP. “Turner sees financial regulation as a force for good for society.”

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net