ABI: Darling must address 'underlap' of responsibility in tri-partite system

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Wednesday, 17, Jun 2009 12:00

The Chancellor should use his Mansion House speech to address the gap between macro-prudential policy and micro-prudential supervision says the ABI. A lack of co-ordination in this area led to the asset price bubble which helped cause the current crisis. The ABI favours the establishment of a new ‘macro prudential committee’ to address any ‘underlap’ of responsibility within the Tripartite structure and prevent the build up of long-term systemic risks to the economy.

The idea comes as part of the ABI’s response to the Turner consultation. Stephen Haddrill, the ABI’s Director General, said:

“The Turner Review is an important milestone in the path to a new regulatory world. We have made it clear that it must not be shaped by a reaction to bank specific problems alone, but recognise the different needs of insurers and the macro problems that affect us all.

“The Chancellor is right in looking to improved bank boards as part of the solution, but we also need a system in place which can spot and deal with long-term risks across financial services. The US has recognised this, by putting oversight at the heart of its expected regulatory reform. The expected Treasury White Paper must therefore map out how the Tripartite system deals with future systemic risks.”

Other conclusions in the ABI response to the Turner Review include:

- Insurance is not banking. Short-term liquidity risk is not a significant concern for insurance companies. The insurance industry would be damaged by a read-across of ‘solutions’ proposed for the banking sector’s prudential stability.

- Insurers are major investors in the banking industry Any ill-judged actions by the regulator or Government could create serious losses for insurers as investors. Any resulting lack of confidence in the banking sector will make it much harder to attract new capital from investors

- Risks arising from two-tier regulation of banks. The creation of a ‘too big to fail’ tier of giant banks distorts competition and creates a moral hazard problem. We believe there are likely to be strong barriers - formal and informal - to entry or exit from this ‘club’ which would reduce competition between banks and effectively eliminate the threat of takeover.

- The treatment of existing bank debt must be handled carefully. Any move from subordinated debt to other forms of capital must be done only after wide consultation, and with as smooth a transition as possible, so existing instruments are run off in an orderly fashion.

- Insurers to issue a wide range of capital instruments. We do not believe there is a case for restricting insurers to a narrow range of capital instruments, since the immediate systemic risks to banks arising from liquidity do not apply to most insurers.

- ENDS -

Notes for Editors

The ABI’s full consultation response will be available shortly on www.abi.org.uk

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