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FSA to banks: boost capital

BANKS considered &ldquo;too big to fail&rdquo; should be forced to hold additional capital and possibly more low risk assets, under new rules proposed by Britain&rsquo;s financial watchdog. In a discussion paper, the FSA also outlined plans to make banks write living wills to plan an orderly wind-down in case of trouble.<br /><br />The British Bankers&rsquo; Association said its members were worried about the competitive disadvantages they would face if they have to put up more capital than international rivals. But the BBA welcomed living wills: &ldquo;The concept of a &lsquo;living will&rsquo; already enjoys industry support &shy;&ndash; a number of banks are engaged in a pilot project with the FSA.&rdquo; <br /><br />Banks are to draw up living wills by the end of March. Experts thought&nbsp; talk of a rift between Bank of England governor Mervyn King, who has called for a separation of &ldquo;utility&rdquo; and &ldquo;casino&rdquo; banking, and FSA chairman Lord Turner was overdone. <br /><br />Rather than enforcing separation, Turner prefers to introduce capital changes that may bring about separation voluntarily. The FSA paper warns that it would be difficult to disentangle the different banking operations, and instead wants to increase capital requirements for trading. <br /><br />Peter Montagnon, the ABI&rsquo;s director of investment affairs, welcomed the idea. &ldquo;It might be helpful if market pressures led to banks reorganising themselves into more manageable units.&rdquo; <br /><br /><strong>FSA PLAN </strong> THE KEY POINTS<br />&9679; &ldquo;Systemically important&rdquo; banks will have to hold more capital and perhaps more liquid assets&nbsp; to reduce the risk of failure<br /><br />&9679; Capital requirements for trading should be increased to separate basic market-making<br />activities and riskier trading, and discourage excessive risk-taking<br /><br />&9679; Major banks should draw up recovery and resolution plans, known as &lsquo;living wills&rsquo;<br /><br />&9679; This may require restructuring certain parts of the banking group such as exiting particular lines of business and selling subsidiaries<br /><br />&9679; An important issue is whether there should be clear separation between the retail<br />deposit-taking businesses and proprietary trading within the group<br /><br />&9679; One possible approach is to lower the capital surcharge for banks which go further in the direction of clear legal separation of different activities<br /><br />&9679; Turner: &ldquo;The overall level of capital required in the banking system must be significantly increased over time.&rdquo;