Requirements of banks to make them 'shock absorber' - FSA

Mar 19 2009 by Anna Blackaby, Birmingham Post

The Financial Services Authority consigned “soft-touch” banking regulation to history as it set out plans for a more intrusive approach.

Lord Turner, chairman of the Financial Services Authority (FSA), said its new regime would impose tougher capital and liquidity requirements on banks to make them “a shock absorber in the economy, not a shock amplifier”.

He is considering making firms link salaries and bonuses to risk management - reining in excessive City pay - as well as restricting mortgage lending.

It stops short of a cap on bonuses or pay but banks must “ensure their remuneration policies are consistent with effective risk management”. This could become a rule for firms deemed vital to the stability of the financial system.

Lord Turner said the FSA had previously concentrated on individual institutions instead of assessing risks to the financial system as a whole. Vital analysis of the potential threat of financial sector trends to wider economic stability “fell between two stools” as neither the FSA nor the Bank of England was focused on the issue. He added that “regulators across the world took their eye off the ball” on monitoring banks’ liquidity, or cash flow. When the crisis erupted, many were left with “toxic” assets they were unable to sell. “The banking system of the future should operate with more and higher-quality capital, reducing its vulnerability to shocks.”

Banks should have “capital buffers built up in good times to be drawn on in economic downturns”. He admitted liquidity and capital proposals would dampen the sector’s “unsustainable” recent growth but played down fears banks would shun London as a result.