Turner reforms ‘will make it tougher to get loans’

Lord Turner’s recommendations to reform the banking system will make it harder for insurers and brokers to borrow money, financial experts have warned.

The FSA chairman announced a review of the UK’s banks last Wednesday, calling for institutions to hold more capital.

Lord Turner said banks needed to be a “shock absorber in the economy, not a shock amplifier”.

He also called for the creation of a pan-European regulatory body. Credit rating agencies, which have been criticised for not adequately quantifying risk, should be regulated, he added.

Ivor Edwards, corporate insurance partner at consultancy Addleshaw Goddard, said Turner’s plans would make loans more expensive.

“It will be more expensive to do things because banks are going to have to put aside more capital to cover potential exposure.”

However, Edwards said the insurance industry would still be looked upon favourably by banks.

“I have spoken to some of the banks. They see it as quite a good market. On that basis they see it as relatively stable, although there have been a few things that look a bit scary,” he said.

Justin Urquhart Stewart, director of Seven Investment Management, said he expected tighter bank lending for at least five years.

“The current situation will constrict insurance companies and their ability to get capital and bank facilities. I think there will be five more years of this until banks are stronger and more capable of fronting out more lending,” he said.

Stephen Haddrill, director-general of the ABI, welcomed proposals for a pan-European regulatory body.

“A supervisor of supervisors, covering the 27 members of the single European market, will greatly benefit UK insurers, the largest insurance sector in Europe.

“However, we believe the FSA should go further and support such a body having the powers to settle disputes between regulators over cross-border companies,” he said.

The international Basel Committee on Banking Supervision will now look at Turner’s proposals for greater capital reserves, which could come into force next year.

A European regulatory body would need to be approved by the Financial Stability Forum, a Swiss-based organisation representing Europe’s financial authorities.

The proposed regulatory body would almost certainly work with Solvency II, the new EU regime on capital adequacy, which is due to take effect next year.