Credit crunch moving into new phase

[BASEL]

ONDON (Reuters) - The credit crunch is moving into a "third phase," affecting the real economy, but concerns about banks' capital and solvency have been largely resolved, a top financial watchdog official said on Thursday.

"I think we need to see the credit crunch as coming in three phases. I would say the first two are behind us," Hector Sants, chief executive of the Financial Services Authority (FSA), said in an interview with Channel 4 news.

"The first one emerged in the summer, triggered by events in the U.S., primarily a liquidity crisis," he said, according to a transcript of the interview released by Channel 4.

"The second stage was concerns around capital and solvency and I do believe that's broadly been resolved both through the determined actions of the central bank -- in particular the U.S. made very clear their support for their banking system -- and of course from the fact we've had a number of banks having rights issues and recapitalising," he added.

"I think those first two phases, which were crises in the City (financial markets), are behind us, but we are now moving into a third phase, where there are the implications for the real economy," he said.

Concerns about the impact of the global credit crunch on Britain grew this week when the Bank of England said the economy could shrink for a quarter or two. Fears of a housing market crash have also grown.

The banking sector was rocked in September by the near-collapse of lender Northern Rock, which the government has since been forced to nationalise, and insurers have also been badly bruised by turbulent markets.

NO QUICK RETURN TO EASY CREDIT

Sants said the FSA did not expect a return to very easy credit for the next few years "but that's not to say we won't see market conditions improve and credit conditions become easier over the next few months."

He said the FSA had been ensuring that British banks had credible capital plans, but it was up to the banks' boards whether they opted for rights issues. "We are confident that all banks have the right plans in place," he said.

Royal Bank of Scotland, HBOS and Bradford & Bingley all plan rights issues.

Sants also said the level of insider dealing in financial markets was "unacceptable."

"Our deterrence factor has to be more effective, so we have recently taken our first criminal prosecution case, and we intend to bring others," he said.

He said the FSA would like more powers, such as the ability to offer U.S.-style plea bargains.

On bankers' bonuses, Sants said the FSA did not support "immediate revenue-driven payouts which don't take into account that money might be paid out against illusory profits."

Sants said the FSA would not encourage the return of very complicated securitised products that he said had sometimes not been fully understood by those buying and selling them.

He added that the vitality of financial markets would benefit from the return of mainstream securitised products, "and we've been encouraging market participants to take that view."

Participants in the market for mainstream securitised products needed to recover their confidence, he said.

"I do believe it will happen in a relatively short period of time. I'd speculate at months, or quarters, certainly not years," he said.

(Reporting by Adrian Croft; Editing by Tom Hals)



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