FSA seeks hedge fund safeguards

HOWARD DAVIES, head of the Financial Services Authority, yesterday called for banks to be required to set aside larger amounts of capital to cover lending to hedge funds which fail to comply with requests for full disclosure about their leverage.

Mr Davies told the Treasury Select Committee that the problem with Long- Term Capital Management, the hedge fund rescued last month, was not so much that banks individually took undue risks but that they were unaware of the totality of the fund's positions or the extent of the borrowing. Applying differential capital requirements - making banks set aside more capital to cover such hedge fund risks - would make the business more expensive and would discourage some lending.

Mr Davies said international regulators had agreed last week in Australia to set up a committee to consider a code of conduct for ensuring banks get a much clearer picture of the risks they are exposing themselves to in lending to hedge funds.