06 March 2008

FT: Banks warn chancellor against rushing reform

Banks have warned Alistair Darling of “unintended consequences” from rushing through proposed new banking laws and urged the chancellor to take more time to examine the far-reaching rules.

Angela Knight, chief executive of the British Bankers’ Association, the lobbying group, has written to the chancellor setting out banks’ concerns about the proposed laws, drawn up following the collapse of Northern Rock.

The proposed powers, billed as the most far-reaching overhaul of banking laws for 30 years, are designed to prevent a repeat of Northern Rock by removing the need for savers to withdraw their deposits from banks that have run into financial difficulty. However, the rules are controversial because, if passed, they would amount to a far-reaching change of insolvency law.

Although banks supported giving the tripartite authorities some new legal powers, Ms Knight said the proposed changes would have implications for British banks and international lenders operating in the UK, as well as other subsidiaries operating in the insurance or fund management industries.

She urged Mr Darling to remove the proposals from the legislation the government hopes to pass by the summer. “It is essential that the tripartite authorities adopt a more realistic timeframe for the more intricate measures falling within the consultation,” she wrote.

Ms Knight criticised the proposed rules for not placing enough emphasis on preventing problems at banks. In a reference to the Financial Services Authority’s failure to react to the risks in Northern Rock’s business model, she wrote: “It is difficult to accept that there needs to be widespread change to the regulatory framework when the regulator did not use all the tools at its disposal.”

The proposed rules recommend overhauling the scheme compensating customers who lose money from an institution’s collapse. The government has raised the possibility of asking banks to contribute in advance to a compensation fund for depositors. But the BBA said such a move, which has been adopted in the US, was “inappropriate” for the UK, which did not have a large number of smaller banks that regularly failed.

By Peter Thal Larsen

© Financial Times