The European banking sector has been accused of being inadequately prepared to support securitization structures under crisis scenarios, despite a heavy reliance by these banks on the capital markets engine for funding. However, through new initiatives, European regulators are now making sure these financial institutions are more aware of the risks involved.
With Northern Rock's failure still in everybody's mind, U.K. financial regulator the Financial Services Authority (FSA) has stepped in to deal with this type of bank crisis. Last December, the FSA began prepping a new scheme that attempts to curtail future bailouts by other U.K. banks facing a similar situation to Northern Rock. According to the proposals under discussion, the FSA can seize and protect depositors' cash when a bank gets into financial difficulties.
Among the initiatives discussed is the development of a series of triggers that would allow the FSA to step in to protect deposits and to access more information to assess a bank's liquidity situation. The FSA intends to develop U.K. policy in line with international work being undertaken by the Basel Committee on Banking Supervision and the Committee of European Banking Supervisors (CEBS).
The FSA paper draws on how banks and building societies coped with the recent market turbulence. It also analyzes the liquidity risks inherent in some of the newer structures, such as SIVs, and other off-balance-sheet or contingent arrangements. The regulator takes its commitment one step further by reviewing its own existing policies and the banks' liquidity management.
Market players say that while the fallout from 2007 won't be solved with a quick and easy solution, the steps the FSA is taking will, at the very least, fix the depositor issue that brought Northern Rock to its knees. As a result, this will prevent other specialist lenders from following the same route.
Until now, European banks have been operating with less capital than those in the U.S., where rules that determine how much capital banks must hold are already in place. The next likely target for European regulators will be credit rating agencies, one market source said.
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