How much of a black hole is left in the banking sector seems unclear to everyone. However, a statement made by Mervyn King, the Governor of the Bank of England on the 24th has already greatly shocked the British public. Peter Sands, the CEO of Standard Chartered Bank affected by this rule, recently complained that due to the FSA's prohibition of payment of stability bonuses, Standard Chartered has lost out to Asian competitors in the battle to recruit bankers. Hedge funds and private equity investment companies have taken over quite a large share of the mortgage business from the banking sector which was troubled by the financial crisis. Some of the FSA's actions have caused complaints among London bankers, including the proposed legislation to crack down on plundering in the City of London and prevent reckless risk-taking by bankers - the Financial Services and Markets Bill. The City of London is trying to persuade the FSA to push for global reform measures, otherwise it would only be tying the hands of its own country's financial competitiveness. Some people in the financial industry privately told reporters that compared to the City of London, the FSA is the one fighting with its back against the water. For the Labour government facing pressure from next year's general election, targeting the financial sector is a necessary move to win back voters because if the Conservative Party wins, the FSA established by the Labour government will not only lose its power to the central bank, but also face questions about its own existence. The FSA has forced the top five banks in the country and eleven foreign banks to defer 40% to 60% of their bonuses to be distributed over the next three years, significantly reducing the overall level of cash portions in this year's bonuses, and banning multi-year guaranteed bonuses. "Although the FSA is very active, it is unclear how things will change next, and everyone is watching," said a senior person responsible for the derivatives design department of a major bank to our reporter, "If the Conservative Party comes to power next year, it's uncertain what will happen to the FSA itself."
The UK Banking Association mentioned in a recent report that profound changes are taking place now - many changes have already occurred, and the banking sector must realize that continuous reforms are inevitable to maintain the global status of the UK financial industry. The financial services sector accounts for about 7% of the UK's GDP, employs one million people, and is crucial to the UK economy.
According to the FSA's investigation, as of 2007, mortgage organizations failed to effectively verify the income of up to 45% of new customers across the entire UK mortgage market.
On November 25th, UK Chancellor Alistair Darling announced another linear plan to empower the Financial Services Authority (FSA), aiming to place the £1.2 trillion mortgage market under the supervision of the FSA, with relevant legislation to be completed early next year.
This partially explains why the FSA leads the charge in financial regulatory reforms. Even in areas where international consensus cannot be reached, the FSA continues to push forward aggressively. The regulatory model set up by the UK Labour government is the 'three-horse carriage' approach with the FSA, Treasury, and central bank working together. However, the Conservative Party has consistently criticized this regulatory model, claiming that once they come to power, they will first abolish the FSA.
In addition, last month's financial reform draft published by the FSA requires systemically important banks to establish 'living wills' to quickly respond to crises, avoiding impacts on financial stability and forcing taxpayers to 'foot the bill'. Banks whose 'living wills' do not meet requirements could be forcibly split into traditional retail banking and funding banking businesses.
Dominique Strauss-Kahn, Chairman of the International Monetary Fund, stated at the annual meeting of the British Industrial Federation on the 23rd that the disclosed bad debts of banks so far account for less than half of the actual total bad debt amount. US banks have acknowledged an estimated 60% of expected bad debts, while Eurozone and UK banks have only disclosed 40%.
Currently, only a handful of people know about this huge sum. This central bank governor said that authorities believed that disclosing this loan would cause even greater chaos in the entire banking system. It is said that all this money was fully repaid by January this year.
He revealed in his testimony to the UK Parliament's Treasury Committee that the central bank provided secret emergency loans totaling £62 billion to the Royal Bank of Scotland and HBOS from October to November last year, with the Royal Bank of Scotland receiving £36.6 billion in cash and HBOS receiving £25.4 billion to ensure these two banks could continue operating.
Mervyn King explained that if no action was taken in the special circumstances at that time, these banks would experience serious situations similar to Northern Rock in previous years, further eroding confidence in the financial sector and freezing the entire UK payment system.
However, higher capital and liquidity requirements leading to substantial accumulated costs will inevitably be passed on to clients through price increases, which would undoubtedly harm London's position as a global financial center according to most bankers in the City of London.
As the direct supervisory department of the UK financial industry, the FSA was tasked after the outbreak of the financial crisis to tighten the restrictions on the financial industry, introducing various reform plans and increasingly strict regulatory measures. Recently, it has targeted UBS and Nomura Securities, issuing hefty fines for non-compliant transactions.
Nevertheless, this report obtained by the journalist on the 25th also emphasized that prematurely implementing certain measures in the emerging regulatory reform proposals could affect economic recovery, thus timing is crucial.
Mervyn King also hinted in his speech on the 24th that the current practices of the FSA attempt to minimize the risk of failure as much as possible, but relying solely on stricter supervision and requiring the banking industry to accumulate capital reserves is insufficient because bankers "will always make mistakes."
This revelation has caused widespread shock, with multiple British media outlets citing it as the top headline on the 25th. George Osborne, the shadow chancellor of the Conservative Party, publicly commented that the secret loan incident indicates that fundamental reforms must be carried out on the UK's "third horse" financial regulatory system, with the Bank of England assuming responsibility.
Relevant theme articles: LAFASO.COM - How policies should be adjusted