The Bank of England is under pressure from parliamentarians to crack down on banks that use their own money to take potentially risky bets on the financial markets.
On only his second day at the helm of the new Prudential Regulation Authority inside the central bank, Andrew Bailey faces questions on how he would monitor proprietary trading.
In a letter from Andrew Tyrie, the Conservative MP who chairs the parliamentary commission on banking standards, Bailey was reminded of the findings of the commission's report into 'prop trading'. The report fell short of calling for a US-style Volcker rule banning some elements of trading, but said that the PRA should ask banks to publish the risk exposures taken by their traders, with the regulator then reporting to parliament each year on the scale of the activities.
"We concluded that proprietary trading is not a suitable activity for UK-headquartered banks to engage in, due to both the prudential and cultural risks it carries," Tyrie said in the letter. "However, we also concluded that it would not be appropriate to attempt immediate legislative prohibition of such activity.
"Instead we recommended that the PRA should monitor indicators of whether banks appear to be engaging in proprietary trading," Tyrie said, although he raised the prospect of a Volcker rule being introduced in the future.
The PRA should "bear down" on any such trading by demanding banks hold more capital against those activities or be prohibited from conducting such trading through "variations of permission" by the new regulator, Tyrie said.
He also asked Bailey whether any legislative changes were needed to enable the PRA to demand that banks report the extent of their trading activities.
The banks that appeared before the commission said they were not currently involved in proprietary trading. "The PRA must exercise its judgment. It should hold the banks to their word. If the PRA concludes, after a period, that it lacks the authority or the tools to carry out this work, it should make clear to parliament where the current legislation or tools fall short," Tyrie said.
The PRA, which has taken over banking regulation from the now disbanded Financial Services Authority, said: "The PRA and its board will be considering the details of the letter and will be responding to the committee directly in due course regarding this important issue."
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