U.K. Banks Face Regulatory Reforms

While Northern Rock's dilemma is yet to be solved, the U.K. bank regulator Financial Services Authority (FSA) is already prepping a new scheme that attempts to curtail future bailouts of other U.K. banks facing a similar situation. The plan will allow the FSA to step in when a bank hits serious trouble. The FSA released its discussion paper on the proposed plan entitled Review of the Liquidity Requirements for Banks and Building Societies at the end of December and will accept market responses to its suggestions up until March 31. Over the summer, the discussion paper will then be followed by a consultation on firmer proposals. The FSA would be allowed to seize and protect depositors' cash when a bank gets into difficulties, according to the proposals under discussion,. Among several of the initiatives discussed is the development of a series of triggers allowing the FSA to step in to protect deposits, and to access more information to assess a bank's liquidity situation. The FSA plans to develop U.K. policy in line with international work being undertaken by the Basel Committee and the Committee of European Banking Supervisors (CEBS). "This paper draws important lessons from how we saw banks and building societies coping with the recent market turbulence. We also analyze the liquidity risks inherent in some of the newer structures such as SIVs, and other off balance sheet or contingent arrangements," said Thomas Huertas, acting managing director of wholesale markets at the FSA. He was referencing to the proposals that currently under a consultation period. "Nor is it a one-sided review -- we also challenge our own existing policies, as well as firms' liquidity management." Royal Bank of Scotland analysts said it is yet unclear how this proposal will affect securitizations.