Emergency funds may not suffice in a crisis
Amalgam of measures is needed, Sants says
London: Emergency funds that would raise bailout money from banks may not be large enough to overcome financial crises on their own, Financial Services Authority Chief Executive Officer Hector Sants said.
A variety of measures was needed to safeguard lenders, said Sants, who also repeated concerns over US plans to prevent banks from investing in hedge funds or trading on their own account.
"I would question the feasibility of raising a sufficiently large fund to cover all eventualities," Sants said on Friday at a speech at the University of Oxford in England.
"The right approach would be a ‘cocktail of measures.'"
Countries are taking different approaches to reforming their regulation and financial architecture. This, even after agreeing to coordinate measures through the Group of 20 Nations.
Hedge funds
President Nicolas Sarkozy of France and British Prime Minister Gordon Brown met on Friday to discuss disagreements over pending European Union regulation of hedge funds, which US Treasury Secretary Timothy F. Geithner has also criticised.
The 27-nation EU is considering the creation of a European Monetary Fund as a lender of last resort in the wake of the Greek fiscal crisis, similar to the International Monetary Fund.
The EMF could be funded in the long run by taxing countries that break the deficit and debt rules of the euro area. Loans would have strict conditions attached. US President Barack Obama in January this year proposed preventing banks from investing in hedge funds or having proprietary trading units as a way of tackling banks that are deemed too big to fail.
"A similar effect can be achieved through the mechanism of increased capital to curtail trading activities as opposed to such structural changes," Sants said.
Alternative
The FSA and the Basel Committee on Banking Supervision have preferred to call on banks to put away more capital against potential losses on their trading books as a way to dampen risk.
The FSA said that banks would have to find as much as £29 billion (Dh106.4 billion) of extra capital by 2011.
Other measures needed to control large banks include living wills where banks plan for their own demise and identify units to be sold or wound down, and levies after bailouts, Sants said.
