![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
'FSA failed dreadfully' says Treasury Committee
A report on financial regulation published by the UK parliament's Treasury Select Committee criticises the UK Financial Services Authority over its handling of the credit crisis.
The report, entitled Banking crisis: Regulation and supervision, was released on July 31. "By any measure the FSA has failed dreadfully in its supervision of the banking sector," the Committee wrote, citing a lack of confidence to follow through with unpopular decisions when faced with resistance from the industry or from politicians.
The Committee also said the FSA was lax in its assessment of candidates for senior banking posts. "The FSA's assessment of whether senior bankers were fit and proper for their posts appears to have been little more than a tick-box formality," the report claims, adding the regulator should have been more diligent in checking for relevant qualifications or experience. The regulator should also be given more autonomy to support systemic stability without needing to justify its actions to the government or the industry, the Committee added.
The report identified four other areas in need of improvement: systemically significant banks, international regulation, macroprudential supervision and institutional reform.
The Committee pointed out that banks that are 'too big to fail' can exploit their implicit guarantee of public support: "In other words, banks can play a high-stakes casino table with the taxpayers' chips." It suggested a "tax on size" administered through the capital regime, with higher capital charges for more complex, interconnected banks – similar to the additional capital requirements for systemically important banks proposed by the US government in June. The report does not rule out the possibility of a ban on proprietary trading by deposit-taking banks at this early stage in the debate – a move originally suggested in January by the G-30 group of banks and regulators.
The international nature of these large banks also came under scrutiny. "Whilst banks may be global in life, they are national in death, because if such a bank were to fail, the regulator in the bank's home state would have the responsibility of resolving the firm," the report said. The Committee therefore recommends national banking units of global banks be obliged to establish as standalone subsidiaries of a parent group, supervised by the host state regulator. Resolving a failed bank would also be easier if banks were compelled to prepare "living wills" – advance plans for their own orderly winding up or restructuring, as recommended by the Bank of England in June – which would help to deal with problematic off-balance-sheet vehicles.
The Committee echoed concerns that regulatory action tended to amplify the credit cycle. "Financial markets have proven vulnerable to the collective temptation to lend too freely when times are good, only to rein in lending unduly when the economic cycle turns," the report said, calling for the introduction of a leverage ratio, regulatory reform in the area of loan-to-value ratios and countercyclical capital rules.
The Committee also argued that existing plans for reform were not enough – as well as the "largely cosmetic" replacement of the Tripartite Standing Committee by the Council of Financial Stability, it said reforms should clarify the responsibilities of the Council's members. "When the dust eventually settles on a new system," it concluded, "the question that we and others will ask is, ‘Who gets fired?'"
See also: Bank of England calls for "credible threat of closure"
Obama reform plans show no progress on OTC derivatives clearing
G-30: large banks may be too big to trade
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Regulation
The standoff over separate account margining
CFTC issues sixth extension of no-action relief as long-awaited final rule stalls
Banks fret over vendor contracts as Dora deadline looms
Thousands of vendor contracts will need repapering to comply with EU’s new digital resilience rules
EU banks lose relief on model test after FRTB delay
Deferment of new trading book regime to January 2025 eats into transition period for “erratic” P&L attribution test
Sunday night football and the Basel III endgame
Big banks, political advocates and housing organisations are unlikely allies in race to dropkick new capital regime
Futures exchanges seek clarity on China licensing regime
Hazy details on landmark Futures and Derivatives Law breeds legal uncertainty, unnerving operators
Some EU banks wanted option to start FRTB on time
Representatives of member states raised possibility with European Commission at July meeting discussing the delay
For US Treasury troubles, treat the cause not the symptom
Regulatory alarm about hidden risk in the Treasury futures market misses the point, fund association execs write
Iosco delays pre-hedging consultation to November
Review into controversial practice splits industry