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UK to reform financial regulation Key issues: Financial regulation
(about 1 hour later)
By Steve Schifferes Economics reporter, BBC News Mr Darling wants to toughen regulation
The UK government is set to announce its plans to reform the financial system to prevent future crises.The UK government is set to announce its plans to reform the financial system to prevent future crises.
But the White Paper will leave many questions unanswered about the role of the key regulators, the Bank of England and the Financial Services Authority.
New powers will be proposed to curb bank lending and prevent asset bubbles, such as the housing boom undermining the real economy.New powers will be proposed to curb bank lending and prevent asset bubbles, such as the housing boom undermining the real economy.
The government has put up more than £1 trillion to bail out failing banks.
The aim, according to Chancellor Alistair Darling, is a "significant toughening up of the regulatory system" in order to "learn the lesson of what went wrong... and make sure we reduce those risks".The aim, according to Chancellor Alistair Darling, is a "significant toughening up of the regulatory system" in order to "learn the lesson of what went wrong... and make sure we reduce those risks".
However, many of the detailed proposals in the White Paper will need further discussion with international regulators and the financial services industry, so only a limited number will be included in parliamentary legislation this autumn - leaving the next government to sort out many tricky issues.However, many of the detailed proposals in the White Paper will need further discussion with international regulators and the financial services industry, so only a limited number will be included in parliamentary legislation this autumn - leaving the next government to sort out many tricky issues.
Angela Knight, head of the British Bankers' Association, says that the government should move cautiously in order not to make the recession worse. It is also expected to leave many questions unanswered about the role of the key regulators, the Bank of England and the Financial Services Authority.
The government plan will build on the proposals made by Lord Turner, the head of the FSA, in March, and endorsed by the G20 summit in April. The US is expected to introduce broadly similar legislation later this week. The government plan will build on the proposals made by Lord Turner, the head of the FSA, in March, and endorsed by the G20 summit in April.
KEY PROPOSALS: WHO WILL BE REGULATED Lord Turner said the future of banking would be 'very different'KEY PROPOSALS: WHO WILL BE REGULATED Lord Turner said the future of banking would be 'very different'
There will be broad power to regulate any financial institution that poses a "systemic" threat to the financial system.There will be broad power to regulate any financial institution that poses a "systemic" threat to the financial system.
"If an activity looks like a bank and sounds like a bank, we regulate it like a bank," said Lord Turner in his report."If an activity looks like a bank and sounds like a bank, we regulate it like a bank," said Lord Turner in his report.
This means that the government will retain the right to examine the books of hedge funds as well as all banks operating in the UK.This means that the government will retain the right to examine the books of hedge funds as well as all banks operating in the UK.
But the Treasury is resisting EU proposals to block US hedge funds from registering and operating in the EU.But the Treasury is resisting EU proposals to block US hedge funds from registering and operating in the EU.
However, other off-balance sheet activities which banks used to hide their risky lending, such as structured investment vehicles, will be brought under regulation.However, other off-balance sheet activities which banks used to hide their risky lending, such as structured investment vehicles, will be brought under regulation.
The government will also be clear that such regulation will have to be agreed at a global level, to avoid firms migrating to "softer" jurisdictions.The government will also be clear that such regulation will have to be agreed at a global level, to avoid firms migrating to "softer" jurisdictions.
KEY PROPOSALS: WHO WILL BE THE REGULATORS Mr Kings says the Bank needs new powersKEY PROPOSALS: WHO WILL BE THE REGULATORS Mr Kings says the Bank needs new powers
The White Paper is likely to endorse the current system of "tripartite regulation" where responsibility in a financial crisis is shared between the Bank of England, the Financial Services Authority, and the Treasury.The White Paper is likely to endorse the current system of "tripartite regulation" where responsibility in a financial crisis is shared between the Bank of England, the Financial Services Authority, and the Treasury.
However, the Bank, which has been given the legal mandate for maintaining financial stability, argues that it needs more powers beyond raising interest rates to carry out its mandate.However, the Bank, which has been given the legal mandate for maintaining financial stability, argues that it needs more powers beyond raising interest rates to carry out its mandate.
Bank Governor Mervyn King has said that without such powers, his role is merely to "preach sermons".Bank Governor Mervyn King has said that without such powers, his role is merely to "preach sermons".
The FSA, which currently has the power to declare individual banks insolvent and trigger a government takeover, says it is more important to resolve how banks are regulated than by whom.The FSA, which currently has the power to declare individual banks insolvent and trigger a government takeover, says it is more important to resolve how banks are regulated than by whom.
One possibility might be to set up a special committee, including both the Bank and the FSA, to look at issues of systemic risk and regulation.One possibility might be to set up a special committee, including both the Bank and the FSA, to look at issues of systemic risk and regulation.
However, if the Conservatives win the next election, they have pledged to give the Bank of England a lead role in financial regulation.However, if the Conservatives win the next election, they have pledged to give the Bank of England a lead role in financial regulation.
KEY PROPOSALS: WHAT NEW POWERS THEY WILL HAVEKEY PROPOSALS: WHAT NEW POWERS THEY WILL HAVE
The key issue in the White Paper will be how to implement the new objective of "macro-prudential" regulation, which aims to ensure that the whole system, and not just individual banks, is prevented from collapse.The key issue in the White Paper will be how to implement the new objective of "macro-prudential" regulation, which aims to ensure that the whole system, and not just individual banks, is prevented from collapse.
One approach, which will be endorsed by the White Paper, is to raise the capital requirements of banks so that they have to put aside more of their funds for a rainy day - and also hold more in cash equivalents, to prevent a bank run.One approach, which will be endorsed by the White Paper, is to raise the capital requirements of banks so that they have to put aside more of their funds for a rainy day - and also hold more in cash equivalents, to prevent a bank run.
Britain may take the lead on this, although ultimately it would seek agreement on a common framework for all banks around the world through the Basel Committee, which sets capital requirements for banks.Britain may take the lead on this, although ultimately it would seek agreement on a common framework for all banks around the world through the Basel Committee, which sets capital requirements for banks.
But there will also be a discussion of other ways to prevent risk - such as self-insurance by banks; more open and transparent derivatives markets; and further restrictions on bank lending.But there will also be a discussion of other ways to prevent risk - such as self-insurance by banks; more open and transparent derivatives markets; and further restrictions on bank lending.
These could be various ways of regulating credit creation, from the restriction on the size of consumer mortgage loans (or a loan-to-value limit) or a higher tax on incremental bank lending when there was a risk of overheating.These could be various ways of regulating credit creation, from the restriction on the size of consumer mortgage loans (or a loan-to-value limit) or a higher tax on incremental bank lending when there was a risk of overheating.
The Bank of England has urged caution in deciding too quickly what are the right instruments. Mervyn King has said that "we are a long way from identifying precise regulatory instruments that would improve the functioning of markets".The Bank of England has urged caution in deciding too quickly what are the right instruments. Mervyn King has said that "we are a long way from identifying precise regulatory instruments that would improve the functioning of markets".
It is possible that some of the regulatory instruments could also be applied to encourage banks to reward their executives differently, so as to discourage too much risk-taking behaviour.It is possible that some of the regulatory instruments could also be applied to encourage banks to reward their executives differently, so as to discourage too much risk-taking behaviour.
KEY PROPOSALS: RESTRICTING THE SIZE OF BANKSKEY PROPOSALS: RESTRICTING THE SIZE OF BANKS
One key issue that is unlikely to be resolved by the White Paper is whether banks should be allowed to grow so big that they pose a risk to the global financial system.One key issue that is unlikely to be resolved by the White Paper is whether banks should be allowed to grow so big that they pose a risk to the global financial system.
Bank of England governor Mervyn King has said: "If a bank is too big to fail, it is too big."Bank of England governor Mervyn King has said: "If a bank is too big to fail, it is too big."
But although the crisis has produced a wave of consolidations within banking, it could prove legally and economically difficult to unravel bank mergers.But although the crisis has produced a wave of consolidations within banking, it could prove legally and economically difficult to unravel bank mergers.
How Turner explained his plans in MarchHow Turner explained his plans in March
One possibility would be to tax big banks more heavily, perhaps with some form of windfall tax to cut their profits, in good times.One possibility would be to tax big banks more heavily, perhaps with some form of windfall tax to cut their profits, in good times.
Another idea would be a return to the US-style separation of investment banking and retail banking (as in the Glass-Steagall Act, which was repealed in 1999).Another idea would be a return to the US-style separation of investment banking and retail banking (as in the Glass-Steagall Act, which was repealed in 1999).
FSA boss Lord Turner says he is "agnostic" as to whether this would be effective.FSA boss Lord Turner says he is "agnostic" as to whether this would be effective.