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Limit prop trading, says Lord Turner

TIGHTER capital and liquidity control is needed at some of the UK’s biggest banks said Financial Services Authority (FSA) chairman Lord Adair Turner, as financial regulators begin plans to crack down on proprietary trading.

Giving evidence to the Treasury Select Committee yesterday, Turner said that the FSA wanted to put “limits” on proprietary trading but that regulators still had to decide on how to separate this type of trading from traditional business for customers such as buying and selling currencies.

Turner told MPs capital requirements would be critical: “There are arguments for limiting the extent to which deposit taking banks undertake proprietary trading which, in the words of the President Barack Obama and Paul Volcker announcement, is unrelated to customer service. The issue is what means can achieve that objective.”

Lord Turner told the committee that the FSA intends to reduce prop trading by enforcing extra capital requirements at the banks. He said a menu of other possible solutions were being considered, including capital surcharges for larger banks, using “living wills” to encourage banks to structure themselves into separate legal entities, and restrictions on the breadth of activities banks can perform.

Other details in Lord Turner’s address included an estimation that the costs of bailing out the UK’s major banks could be lower than expected and may not exceed 10 per cent of the UK’s gross domestic product.

The FSA will outline later this month how it plans to intervene earlier to stop misselling of financial products but is likely to stop short of seeking new laws to regulate products directly.