Creditors Should Take Losses in Bank Crises, FSA’s Turner Says

Creditors of crisis-stricken banks should take losses before taxpayers have to, U.K. Financial Services Authority Chairman Adair Turner said.

Regulators should be able to “impose losses on all debt providers” in a crisis, Turner said in a speech in London yesterday. He also said the most systemically important lenders should face tougher capital requirements than smaller banks.

“It is essential that private fund providers to banks can absorb losses without this triggering” fire sales of assets or a “reduced credit supply,” Turner said.

The European Union is working on rules aimed at averting a repeat of the financial crisis that followed the 2008 failure of Lehman Brothers Holdings Inc. and resulted in European governments setting aside more than $5 trillion to support banks. The plans may require some creditors to accept losses in the event of a crisis.

Turner said that while the latest standards from the Basel Committee on Banking Supervision are a major step forward, “in an ideal world” equity capital requirements would be as high as 15 percent to 20 percent of risk-weighted assets.

“Regulators are the inheritors of a half century long policy error, in which we have allowed private sector banks to pursue their private interest in maximising leverage levels, at times influenced by a deep intellectual confusion between private costs and social optimality,” Turner said.

The Basel Committee last year recommended that banks hold capital of about 7 percent of their risk-weighted assets.

Turner also said that stress tests on lenders should err on the side of “excessive caution.”

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