The FSA has published the Turner Review together with a supporting Discussion Paper.
The Review identifies three underlying causes of the financial crisis being macro-economic imbalances, financial innovation of little social value and important deficiencies in key bank capital and liquidity regulations. According to the Review these causes were underpinned by an exaggerated faith in rational and self correcting markets.
The Review stresses the importance of regulation and supervision being based on a system-wide "macro-prudential" approach rather than focussing solely on specific firms. The recommendations in the Review include:
- Fundamental changes to bank capital and liquidity regulations.
- More and higher quality bank capital, with several times as much capital required to support risky trading activity.
- Counter-cyclical capital buffers.
- A central role for much tighter regulation of liquidity.
- Increased reporting requirements for unregulated financial institutions such as hedge funds.
- Regulation of credit rating agencies.
- Major changes in the FSA's supervisory approach, with a focus on business strategies and system wide risks.
- Major reforms in the regulation of the European banking market.
The Review also discusses areas where it is premature to recommend specific action but where wide-ranging options need to be debated. These include product regulation in retail (e.g. mortgage) and wholesale (e.g. credit default swap) markets.
The Discussion Paper which accompanies the Review sets out more detail on the policy proposals on the changes to banking regulation and the FSA's supervisory approach.
The deadline for comments on the Review and the Discussion Paper is 18 June 2009. The FSA will then publish a Feedback Statement setting out how it plans to take the proposals forward.
View The Turner Review: a regulatory response to the global banking crisis, 18 March 2009
View Discussion Paper 09/2: A regulatory response to the global banking crisis, 18 March 2009