Britannia Radio

From The Sunday Times

April 4, 2010

The world's biggest investment banks ordered to inject billions

Iain Dey

Some of the world’s biggest investment banks could be forced to pump billions of pounds into their UK businesses following a probe by the City regulator.

The Financial Services Authority has been conducting stress tests on the British operations of foreign banks to examine what would happen if their parent companies went bust.

The regulator wants the banks to ensure that their British businesses hold enough capital to be able to stand on their own two feet if their parent companies suddenly stop trading.

The investment bank probe follows concerns that emerged following the collapse of Lehman Brothers in September 2008.

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Lehman’s London business operated through funding lines from its US parent. When the American business realised it was about to to go under, its directors pulled out every penny from the London business overnight, leaving it unable to pay its wages bill.

It is understood that a number of other overseas banks still operate with similar structures, with the capital used to support the UK business being held in the parent company.

Citigroup, JP Morgan, Bank of America Merrill Lynch, UBS and Credit Suisse are all believed to be included in the investigation.

Dozens of banks are thought to have applied to the regulator for a waiver, giving them one more year to find the cash.

A handful, including Goldman Sachs and some European institutions, are understood to have proved to the regulator that they are already structured appropriately.

The investigation was alluded to in a report last year by Lord Turner, the FSA chairman. It is being conducted to coincide with responses to the consultation on the new Basel III accounting rules proposed by global regulators last year.

Some bankers have started to lobby politicians ahead of the G20 meeting in Washington at the end of this month to ensure that the regulatory changes are not introduced too quickly.

The FSA is also conducting a second wave of stress tests on British banks, to ensure that they have enough capital to withstand a double-dip recession.