Christine Lagarde accuses Financial Services Authority boss of undermining confidence in EU stress tests
French finance minister Christine Lagarde has launched a scathing attack on Britain's financial watchdog for undermining a proposed system of regulating EU banks.
She accused Lord Turner, the chairman of the Financial Services Authority (FSA), of unwarranted criticism of the new stress tests on Europe's banks.
She said the EU tests were tough and would force banks to set aside funds to protect against another financial crisis.
EU ministers have faced severe criticism over concerns that individual countries will be able to avoid some of the more stringent tests.
Last year about 90 banks were tested and only seven failed, none of which was Irish. Yet a few months later the Irish banks had to be bailed out.
Turner said recently that the new tests would be "a useful exercise" and better than last year's flawed tests but that Britain's own tests are more rigorous: "I suspect you will find that our parameters will be tougher and tighter than the European ones. They were last year."
Lagarde said: "I respect the fact that he wants to be more demanding and thorough, and have reforms that are deeper and better than today, but the way he is going about it undermines confidence in the process."
She said Turner misrepresented the strength of the European stress tests, which she said were beyond what a bank would normally be expected to cope with. "It wasn't explicit in what he said, but it was implied. It wasn't fair.""
Defending the design of the EU bank tests, she said:
Lagarde added: "The type of stress that will be used to test the capital ratios of banks is much stricter than last time. It is sufficiently stressed to be an unrealistic expectation of what they will face."
French banks, like UK banks Royal Bank of Scotland, HSBC and Barclays, combine retail and investment banking. The UK's independent banking commission is expected to rule that banks must separate their investment banking businesses from their high street business, but stop short of calling for a full divorce.
Lagarde said she was not planning to break up the French banks, which had remained strong. "If you look at the banks that caused the crisis, they were not universal banks. Northern Rock was not a universal bank," she said.
A crackdown on bank bonuses in France in the immediate aftermath of the crash has kept most senior French bank bosses out of the headlines.
However, recent awards to the chief executives of Société Générale, BNP and Crédit Agricole have sparked protests – even though they were well short of the payouts to Barclays' boss Bob Diamond and RBS boss Stephen Hester.
Lagarde said a pay regulator she appointed in 2009 had blocked €800m (£700m) of bonuses to bank staff.