March 15, 2013 / 12:19 AM / 5 years ago

No need to ban banks from proprietary trading - Banking Standards committee

LONDON (Reuters) - A U.S.-style ban on Britain’s banks trading with their own money is not needed and would be too difficult to enforce, members of an influential committee said on Friday.

Instead, Britain should use the threat of capital add-ons or other tools to bear down on any bank that shows signs of proprietary trading, said the Parliamentary Commission on Banking Standards (PCBS).

The PCBS said a U.S. ban on proprietary trading, known as the Volcker rule, has shown it is difficult to define and prohibit such trading, and it would impose an extra burden on UK regulators who already have to enforce a complex separation of banks’ retail operations.

“The Banking Commission does not feel it appropriate to recommend the immediate prohibition of proprietary trading,” said Andrew Tyrie, chairman of the PCBS.

But he did not rule out a ban in the future.

“Were this approach to prove ineffective, further measures, including prohibition, could be desirable,” he said in report released by the PCBS.

There has been limited support for a “Volcker rule” in Britain, which is pushing through plans to shield retail banking arms from riskier investment banking activity, called Vickers reform, as a way to safeguard taxpayers and depositors from any future banking troubles.

Incoming Bank of England Governor Mark Carney last month said there was no need to add a Volcker rule, citing the difficulty in drawing a line between market-making and proprietary trading.

The PCBS is finalising its report on banking standards, and its proposals could be added to a banking reform bill currently being discussed in Parliament.

UK banks told the PCBS they do not engage in proprietary trading and said they do not want to, but Tyrie said that could change: “At a time when banks are under less intense scrutiny, proprietary trading could re-emerge as a greater risk.”

He said proprietary trading was not a suitable activity for a bank, and could lead to conflicts of interest, have harmful cultural effects and raise pay expectations.

The Prudential Regulation Authority, which takes over UK financial regulation in April, should pay close attention to big trading units and volatile revenue flows, and if it spots potential proprietary trading it should use capital add-ons or other methods to incentivise the firm to exercise tighter control, Tyrie said.

Reporting by Steve Slater; editing by Stephen Nisbet

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