Call for UK proprietary trading crackdown

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A crackdown on UK banks from trading on their own account has been urged by a commission of MPs and peers set up to make recommendations to improve UK financial services in the wake of the Libor rate-rigging scandal.

The Banking Standards Commission has called for the City watchdog to rein in so-called proprietary trading by imposing extra capital requirements or changing the authorisation rules for broker-dealers.

However, in a report due to be issued Friday, the commission stopped short of calling for a full ban on banks trading with their own funds. It said it had been convinced by industry testimony that most banks had moved out of prop trading and that a standard such as the US “Volcker rule” was too hard to define and implement.

But it called on the new Prudential Regulation Authority to “bear down” and discourage a return to the practice by forcing banks to disclose more information about their trading and then imposing extra capital requirements or other new rules to discourage activities that do not appear to serve clients.

Andrew Tyrie, commission chairman, said: “The immediate risk to UK banking standards from proprietary trading may be limited. However, effective regulatory oversight will be particularly important for the future. At a time when banks are under less intense scrutiny, proprietary trading could re-emerge as a greater risk.”

The recommendation is part of a revolt by senior MPs and peers who want the government to crack down harder on the banking sector. This week, the commission demanded that George Osborne, chancellor, tighten the limits on overall bank borrowing, or leverage, to require banks to hold equity equal to 4 per cent of total assets, rather than 3 as called for in Basel III rules. In addition to Mr Tyrie, the commission includes former chancellor Lord Lawson; Justin Welby, Archbishop of Canterbury; and former Treasury select committee chairman Lord McFall.

The commission report said the group agreed with banks that determining whether an individual trade qualified as prop trading would be “burdensome” and invite cheating. It said plans to ringfence retail banking operations would address part of the problem.

But the commission report suggested that the PRA could use a “range of metrics” to determine whether an individual bank was engaging in a pattern of trading that met the characteristics of risky prop trading. During commission hearings, several witnesses said that when a bank’s daily measure of “value at risk” fluctuated significantly, it was probably evidence of proprietary trading.

The British Bankers’ Association called the proposals “thoughtful and practical”.