FSA to Receive New Powers to Deal with Troubled Banks

January 2008
Financial Services Advisory Update, Vol. 4, No. 9
Malcolm Mclean

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Alistair Darling, the UK Chancellor, has recently announced that the Government will introduce new legislation within the next few months which will grant additional powers to the FSA and the Bank of England. The key points of the announcement include plans to:

• Grant the FSA greater powers to ensure that it can be satisfied that capital and liquidity requirements are met
  
• Address some of the difficulties which may be encountered when insolvency laws are applied to banks — for example, by considering models used in other countries which allow regulators to appoint persons to intervene when certain trigger points are reached and restructuring institutions to isolate troubled parts of the institution
  
• Improve depositor protection

One issue that may generate debate is the triggering point for the FSA to intervene in a failing bank. The Chancellor has suggested that a possible trigger could be the point at which a bank requests a "lender of last resort" loan from the Bank of England, such as the recent request made by Northern Rock, a UK bank.

The Government is expected to launch a consultation paper containing the new proposals very shortly. This will be followed by a three-month consultation period after which draft legislation will be enacted, which should be around May 2008.

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