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FSA to require big UK banks to draw up a ‘living will’

Several large British banks will be required to draw up “living wills” by the end of the year to outline procedures to help them wind down if they fail, under proposals by the country’s financial services regulator on Thursday.

The Financial Services Authority (FSA) said banks regarded as “too big to fail” will also have to hold more capital as an insurance against the dangers posed to the financial system if they collapsed.

The living wills will include ways of splitting a bank’s deposit-taking arms from securities trading units.

“Restructuring could include clear separation between retail deposit taking business and businesses involved in proprietary trading activities, with the latter able to fail even if the former were supported in crisis conditions,” the FSA said.

The proposal stopped short of adopting suggestions by Bank of England Governor Mervyn King that banks should split low-risk retail from so-called “casino” investment banking before the need for a living will arises.

King is at odds with the government over his proposal, with British Prime Minister Gordon Brown saying that the proposal was too simplistic for modern banking and wider reform was needed.

The FSA is currently working on wills as part of a pilot program that it expects to roll out across the banking industry.

“The FSA has to reduce the danger that authorities in future will be faced with only one option — using public funds to rescue whole groups with only equity holders suffering loss and we must also limit the extent to which implicit government guarantees support unnecessary levels of risky proprietary trading,” chairman Adair Turner said.

The FSA said that bumper investment banking profits should be used to bolster balance sheets rather than be paid out in bonuses. Systemically important banks will have to hold more capital with more emphasis on the strength of national subsidiaries in global banks to ensure that the British government is not tasked with rescuing the entire group.
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