Turner urges 'living wills' for top banks

By Lucy Farndon
Updated: 16:06 EST, 21 October 2009

FSA chairman Lord Turner will today set out the regulator's thoughts on how to reform the banking sector by introducing ' living wills' in a paper which is likely to put him at odds with Bank of England governor Mervyn King.

Turner, renowned for his outspoken views, is also likely to signal that King was rash to suggest that banks need to be sliced in two to separate the savings and deposit taking business from casino-style investment banking.

The FSA has conducted further analysis of the best way to deal with banks that are deemed 'too big to fail' and the need for regulatory changes.

In its second discussion paper following the Turner Review in March, the FSA will give a more detailed outline of how major banks will be required to make ' living wills' to plan an orderly winddown in case they get into trouble.

Turner is keen to create an internal structure at the banks which makes it easy to separate the retail business, which hands loans and deposits to consumers and companies, from their riskier investment-banking arms.

This would ensure consumers are protected, even if the rest of the business falls into the mire.

The FSA will also provide further analysis of the impact of higher capital requirements and other regulatory changes on the financial sector.

The discussion paper will look at the extent to which banks must be made to protect themselves against problems, and whether costs will be too onerous for the industry to bear.

It has already signalled there may have to be 'trade-offs' between the costs of intervening and the need for financial stability.

Turner will suggest how to identify the firms that are 'systemically important' and need to be kept afloat to ensure the stability of the financial system as a whole.

This area has been fraught with difficulty because the government has made it clear it believes even relatively small firms, such as Northern Rock and Dunfermline Building Society, cannot be left to fail because of the impact on consumers and market confidence.

Meanwhile, King's controversial comments about the fate of big banks continued to ruffle feathers in the City and political circles.

Big banks argue that the costs of splitting themselves up would cause a major economic strain and make it harder for the government to get back the trillion pounds in support that it has given the industry.