By Brooke Masters, Chief Regulation Correspondent
UK banks should be making ?contingency plans? in case the eurozone collapses and must continue to reduce their reliance on short-term funding and risky assets, the main UK banking supervisor says.
Andrew Bailey, director of banking at the Financial Services Authority, was careful to say he was not predicting a crisis when he told an audience in London: ?We are very keen to see that the banks plan for any disorderly consequences of the euro-area crisis. Good risk management means planning for unlikely but severe scenarios.?
Mr Bailey said events in Europe had shown the UK was correct to push for its world-first liquidity standards, which require banks to hold enough easy-to-sell assets to withstand a market crisis or funding squeeze. UK bankers have complained bitterly about having to meet the standards now because the global version, which is part of the Basel III reform package, does not become mandatory until 2015.
?I would be misleading you to think that any bank thanked us for pushing for early adoption of what is in effect a proto-Basel III liquidity standard. It was a unilateral UK action. All I can say is that what happened next demonstrated that it was the right thing to do,? Mr Bailey said.
Eurozone banks have struggled since the summer to raise short-term debt as fears rose over their exposure to Greece, Italy and other sovereign debt.
Mr Bailey?s spirited defence of the liquidity rules comes as some UK executives step up their criticism of the FSA?s tougher stance. At a gathering sponsored by the Association of Corporate Treasurers, they argued that a requirement for banks to hold more capital and liquidity, and efforts to force over-the-counter derivatives on to exchanges and into clearing houses, would drive up company costs.
?There is a real risk that gold-plating ends up shutting the whole system down,? Mark Morris, group treasurer of Rolls-Royce, said.
Supporters of the new regime counter that pre-crisis prices for loans and derivatives understated the risk and amounted to a taxpayer subsidy to both banks and customers.
Mr Bailey said some banks would have to rethink their business in light of Basel III, particularly when taking bets with their own money rather than dealing for customers. ?The reforms to regulation are raising the cost of that activity, and rightly so. I don?t think we should rule out that for some banks an exit from investment banking, beyond perhaps continuing to provide services to corporate banking clients, is the sensible outcome.?
When the FSA is broken up next year Mr Bailey will serve as deputy chief executive of the Prudential Regulatory Authority, with responsibility for banks and insurers.
? The Financial Times Limited 2011