FSA warns of trading book capital hikes

By Huw Jones

LONDON (Reuters) - Banks will have to set aside far larger amounts of capital to cover trading risks in future, the country's top financial watchdog said on Tuesday in a move backed by Europe's top bank.

Policymakers applying lessons from the credit crunch are focussing on a mix of better supervision of risk and tougher, so called 'capital charges' on banks to curb excessive risk taking.

In his toughest speech yet on the subject, Adair Turner, chairman of the Financial Services Authority, said bank capital rules must be radically altered as improving supervision will be imperfect at best in spotting "bumps on the road."

"The most fundamental change is to create a financial system with more shock absorbers, and the shock absorbers of the banking system are capital and liquidity," Turner told a British Bankers' Association (BBA) conference.

"Capital requirements against trading books need to be significantly increased," Turner said.

There was also a need to go back to basics and look at the different risk characteristics of different elements of the trading book and think through appropriate approaches from first principles, Turner added.

Mandatory capital charges for assets held on a bank's trading book are generally lighter than for those held on the bank's main balance sheet.

Bankers say if the capital charge becomes higher on the trading book than on the bank's main book, some banks will exit trading and this would allow a small group of super banks with deep pockets to dominate the sector.