FSA looking to break up banks

2 March 2010 | By Natalie Thomas

Lord Adair Turner, chairman of the FSA has been giving evidence at today’s Treasury Select Committee hearing on ’Financial institutions - too important to fail?’.

Turner says it is looking at a number of options such as equity capital requirements which are higher for larger banks, using resolution and recovery plans to encourage banks to structure themselves into separable legal entities, whether by geography – i.e. separate national subsidiaries, or by function.

It is also looking to separate subsidiaries for deposit taking and trading activities and introducing restrictions on the breadth of activities which different types of banks can perform.

He says there are arguments for limiting the extent to which deposit taking banks undertake proprietary trading which, in the words of the Obama/Volcker announcement, is unrelated to customer service.

The FSA says the issue of tighter liquidity requirements for lenders and constraining credit supply in an upswing are more important than the issue of too big to fail.

He says if  the big UK banks which needed to be rescued in autumn 2008 had been multiple smaller banks, we might still have had just as much over exuberant lending to commercial real estate developers, funded by risky short-term wholesale deposits.

He says: “Tighter capital and liquidity requirements on all banks, and new counter cyclical macro-prudential tools which constrain credit supply in the upswing, may be even more important than fixing the too-big-to-fail problem.”

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat