U.K. lawmakers on Friday called on Britain’s new financial regulator to discourage deposit-taking banks from making risky bets in financial markets with their own money.
A parliamentary commission examining standards in banking said it is concerned about the risks to commercial banks’ financial health and culture from such proprietary trading.
The commission said U.K. banks don’t currently engage in proprietary trading but wants the Prudential Regulation Authority, which will take over policing the financial system from the Financial Services Authority in April, to “bear down” on such activity if it re-emerges.
“The immediate risk to U.K. banking standards from proprietary trading may be limited. However, effective regulatory oversight will be particularly important for the future. At a time when banks are under less intense scrutiny, proprietary trading could re-emerge as a greater risk,” said Andrew Tyrie, the commission’s chairman.
The commission stopped short of calling for a ban. In the U.S., the Volcker Rule prohibits deposit-taking institutions from proprietary trading. U.K. reforms have instead focused on “ring-fencing” a bank’s retail activities from their investment banking arms by placing services to households and businesses in separately capitalized units.
“The use of legislation to define and prohibit proprietary trading may be difficult. In any case, it may impose an additional burden on regulators already charged with implementing a ring-fence. Therefore, the banking commission does not feel it appropriate to recommend the immediate prohibition of proprietary trading,” Mr. Tyrie said.
The panel said the PRA should pay close attention to banks’ trading units and ensure any trading was being carried out solely on clients’ behalf. Banks should be required to provide the PRA with details of their trading books, the commission said.
Mr. Tyrie said the case for an outright ban should be revisited if this approach proves ineffective.
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UK Lawmakers Discourage Proprietary Trading – Fox Business