Sants seeks power to expose bank flaws

The new regulator taking over the supervision of big UK financial institutions in 2013 should be charged with investigating bank failures and making public its findings, a senior watchdog has urged.

Hector Sants, the chief executive of the Financial Services Authority, who has been tipped to head the new Prudential Regulatory Authority, told the Financial Times the regulator would need this explicit power to avoid a repeat of the recent brouhaha over the Royal Bank of Scotland.

The FSA, the current regulator, announced in Dec­ember it was barred under confidentiality rules from explaining why it was closing its probe of RBS’s 2008 collapse without bringing charges.

When the move prompted intense criticism, two City leaders were appointed to conduct an independent review that would report on what went wrong with the bank, which is now 83 per cent government owned.

“When a bank failure does occur, based on some trigger, maybe the commitment of public money, it would be appropriate that the PRA does deliver a report . . . We want to move away from the difficult situation in which the FSA found itself with RBS,” Mr Sants said.

Mr Sants is due on Thursday to unveil detailed plans for the PRA, for which draft legislation is expected to go to parliament in June.

About 25 per cent of FSA staff will transfer to the PRA, a new arm of the Bank of England that will focus on the safety and soundness of banks, insurers and large brokers.

“We are extremely keen to get real clarity from stakeholders about what the PRA should and should not be held be accountable for doing,” Mr Sants said.

The FSA’s other responsibilities will go to the new Financial Conduct Authority. A similar consultation on its powers is expected next month.

Unlike the FSA, which was criticised for being too passive before the 2007 financial crisis, the PRA is intended to be a hands-on regulator.

Every bank or insurer will be supervised by a team that will be expected to have a detailed understanding of its business model and weak points. Tailored stress tests will seek to predict how a bank would respond to various economic scenarios, and senior regulators will meet top management at the biggest UK institutions.

“This is a single-objective regulator. It enables us to have a much more simplified approach and lets us put even more emphasis on being forward looking,” Mr Sants said.

Some bankers and brokers have raised concerns that the new approach will give regulators too much power to overrule managers and investors.

However, Mr Sants said he would seek to force banks to become more transparent so that investors could make their own decisions.

“We do not want to substitute the regulator for the responsibility of the firm’s management, board and shareholders . . . What the regulator can do is equip the market better to exercise market discipline.”

Mr Sants also wants to require banks to make public detailed information on their holdings – data that currently goes only to ­regulators.

Andrew Bailey, who will be Mr Sants’s deputy at the PRA, said: “It is allowing people to do some quite serious diagnostic work in the market to reveal the situation of the individual institutions.”

Bank analysts said the regulatory data would make it easier to determine how each bank had calculated its core tier one capital ratio, a crucial measure of bank safety. The results can vary wildly depending on the way assets are adjusted for risk.

“We know different approaches are being used . . . It would be nice to know which banks are playing by which rules. Right now it is a black box from the outside,” said one ­analyst.

While the PRA’s main focus will be on the UK institutions, it is also charged with supervising the London outposts of overseas banks.