Banks fear effect of FSA rule changes

The trade body for banks will tell the Financial Services Authority today that proposed changes to capital and liquidity requirements do not “strike the right balance”.

The British Bankers’ Association says in a letter to the regulator there must be an urgent assessment of the costs of complying with the new rules.

In the letter to Hector Sants, the FSA’s chief executive, Angela Knight, head of the BBA, says forcing banks to hold more capital, and a higher proportion of funding in liquid form, will constrain balance sheets as banks are being urged to lend more to cash-strapped companies and individuals.

“Insufficient attention has been paid to understanding the impact of these measures or the way in which they interrelate,” she says. If the recommendations of the Turner review on bank regulation, published in March and now under consultation, are implemented as they are, there is a risk of an “undue constraint being placed on the ability of banks to support households and firms by continuing to lend as we emerge from the recession”.

Ms Knight told the Financial Times that Lord Turner was “on the right track as regards regulation, liquidity and capital” but added: “When the cost of operating a banking business is going to be significantly more in future – because of the requirement for more capital and more liquidity – that bank cannot lend more as well as hold more [capital and liquidity].”

She called for a “full impact analysis” within the next three months of the cost of implementing the new regulatory proposals.

Ms Knight said that of every £500 of required funding for UK companies, only £300 was supplied by high-street banks. The shortfall, she said, would widen under the proposed regulatory regime.

“The banking industry is already holding twice as much capital as before the credit crunch and there has been a significant reduction in its capacity to lend,” she said.

“That’s an example of getting to the right result on stability but with an added consequence that you did not intend.”

The funding gap would widen if many overseas banks with UK operations were forced, as planned, to hold more liquidity within 18 months, in the absence of bilateral agreements with home country regulators.

“Unless those agreements with the home countries are in place – if it takes longer than 18 months – the [new rules] must be delayed.”

Ms Knight said international harmonisation of rules was vital.