FSA draws up banking blacklist

The Financial Services Authority, Britain's new City watchdog, is drawing up a blacklist of high-risk foreign banks operating in London. The FSA will introduce a new requirement into the London banking market so that foreign banks perceived to be weakly regulated in their home markets are made to carry more capital in London than more highly supervised counterparts.

The measures are in part a response to the Far East banking crisis, which has revealed serious failings in banking regulation in many parts of the world.

Howard Davies, FSA chairman, said foreign banks operating in London were being risk assessed for division into three categories. Banks from countries judged to be of poor risk - such as some former Soviet Union states, Cuba, and a number of offshore centres - would be penalised by having to hold significantly larger quantities of capital in reserve in London if they wished to operate here.

Less high-risk countries would have their banks assigned to a second category for capital requirements while those judged to have standards of supervision and capital adequacy at least as good as the UK would be put on an equal footing with US and Western European banks.

Mr Davies outlined key elements in a longer-term programme of regulatory change in the light of the Asian crisis. Measures would need to be introduced to disentangle banks from industrial companies on the one hand and government on the other.

It was vital to strengthen management, accounting standards and rules of disclosure among banks in developing economies. There was also a need to encourage broad and deep domestic bond markets which would expose corporate debt to market analysis and discipline. The region also needed to be opened up to foreign competition in banking.