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Governance

BBA warns against legislating in haste

Tuesday, 08 April 2008

Banks need more time to ensure regulatory reforms do not have unintended consequences.

The British Bankers' Assocation (BBA) has submitted to the Chancellor of the Exchequer its detailed response to the Government’s proposed banking reform package in the wake of the Northern Rock affair and the credit crunch.

Better use of existing FSA powers

The reform package – the most significant banking reform proposals in 30 years – was issued in January by the so-called tripartite authorities (HM Treasury, the Bank of England and the Financial Services Authority).

Since then the BBA has been working with the authorities, providing ongoing commentary and successively more detailed responses, culminating in the paper submitted.

Angela Knight, BBA chief executive, said that the banks support the reform package in principle and will work with the authorities to ensure its measures are developed with the full engagement of the banking industry.

She adds that they do wonder, however, whether enough weight has been placed on what can be achieved through the FSA making better use of its existing regulatory powers and by escalating its ability to intervene.

"We are extremely concerned about the aggressive legislative timetable the Government is proposing to follow, particularly on the complex special resolution regime and bank-specific insolvency arrangements,” Knight says.

Embrace radical change

The proposals contained within the consultation document are far-reaching: it contains 29 legislative proposals, 11 proposed rule changes on which the FSA plans to consult and a further 23 highly significant matters labelled "operational changes".

The BBA says that market stress can be significantly calmed through improvements in the operation of tripartite arrangements and a more efficient application of the Bank of England’s money market operations.

This would require the Bank to embrace more radical change in its current review of the sterling money market.

The banks say that depositor protection arrangements can and should be improved but add that any such scheme cannot be pre-funded – making faster payments to customers should be the priority, but the banks claim that the paper’s proposals to achieve this are not practical.

Fair value accounting

The BBA warns that placing inflexible rules on the statute book on the special resolution regime and bank-specific insolvency arrangements would have the potential of damaging the competitiveness of the UK financial markets and the financial standing of banks that operate within them.

“We have major concerns about proposals being pursued by the International Accounting Standards Board (IASB) on both the scope and application of fair value accounting,” Knight says.

She believes that when many reforms are packaged together like this, unintended consequences can often follow.

“We need full consultations on any legal changes arising from this package to ensure they can achieve what is intended without damaging this highly complex industry,” Knight concludes.

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