UK banks face 'intensive' regulation, FSA boss warns

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Media captionWatch: Hector Sants says "regulators cannot rely on the judgement of the firms they supervise"

Banks have been told they will be much more strictly supervised by the new Prudential Regulation Authority (PRA).

The warning came from Hector Sants, the incoming boss of the PRA and the current head of the Financial Services Authority.

He told an audience of senior banking executives that they could not be relied on to avoid making mistakes that endanger the financial system.

He described the new approach as "close intensive engagement".

"Central to this supervisory model is the presumption that regulators cannot rely on the judgement of the management of firms they supervise, and must take their own view formed from their own analysis of the significant issues which affect the safety and soundness of the firm," said Mr Sants.

"Furthermore, where that judgement differs from that of the firm's management, the regulator must act," he added.

'Welcome step'

The decision to carve up the FSA was made by the newly elected coalition government last year after the financial crisis in 2007 and 2008 exposed problems with the regulatory regime.

The Treasury published a second formal consultation document on its plans in February this year.

The audience of banking executives was called to hear the latest thinking of the FSA and the Bank of England about how the new regulatory regime will work.

Andrew Bailey, who will be the deputy chief executive of the PRA, warned them that this would not involve trying to save insolvent banks at all costs.

"Key elements... will be to ensure that financial firms do business in such a way that adverse effects on the UK financial system are avoided and to minimise damage to the system in the event that a firm does fail," he said.

"We will seek to ensure that all firms it [the PRA] regulates can fail or be closed in an orderly manner with minimal impact on the financial system, consistent with the PRA's objective of promoting financial stability in the UK," he added.

Angela Knight, of the British Bankers' Association [BBA], said: "Today's announcement, setting out the authorities' approach to banking supervision in the future, is a welcome step forward offering a real opportunity to progress the lessons we have all learned to create a stronger regulatory framework for the future."

New regime

The PRA, which will be a division of the Bank of England, is being created next year to replace and improve on some of the functions of the Financial Services Authority, which is being closed down.

Responsibility for supervising the way financial firms treat their customers will go to a separate Financial Conduct Authority (FCA).

The PRA will be responsible for supervising all banks, building societies and credit unions, plus insurance firms, amounting to more than 2,000 firms companies.

All of these will be subject to a minimum "baseline" level of supervision.

The joint FSA and Bank of England discussion document says that collectively the deposit-taking institutions functioning in the UK have worldwide assets worth about £9 trillion - about seven times the total annual economic output of the UK.

So the PRA will concentrate its efforts on the small number of very large banks, including some investment banks, whose failure would have the biggest impact.

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