Banks resist tough rules on capital

Larger banks are resisting efforts to impose tougher capital requirements on institutions deemed "too big to fail", it was revealed today.

The Financial Services Authority's (FSA) feedback from Lord Turner's review of the crisis said "a number of larger firms" opposed the idea of bigger capital buffers for systemically important banks.

Larger banks are open to more intensive supervision by the regulator but if they are forced to hold more capital their profits will suffer.

The FSA's summary of responses said: "Their view contrasted with other respondents, who were more in favour of tougher requirements, which were felt to be needed to guard against failure."

Other respondents favoured breaking up important banks - which could boost competition - and added that the presence of institutions deemed 'too big to fail' created "an unacceptable degree of moral hazard" due to implicit guarantees from the regulator.

Banks responding to the Turner Review also called on the regulator to take an "international approach" when looking at policy options.

They raised concerns that any toughening up of regulations and capital requirements imposed by the UK alone could damage London's competitiveness as a financial centre.

The FSA is to issue a further discussion paper in the next month tackling the issue of systemically important banks and policy tools such as the design of 'living wills' to wind down failed banks in an orderly manner.

It will also present its latest thinking on the cumulative impact of the various measures under discussion, such as higher capital requirements for riskier trading activities and forcing banks to build up bigger buffers in good years to weather downturns.

"The global regulatory community must consider carefully how the several different changes to the capital regime fit together, avoiding unintended consequences for the real economy," the FSA said.