The Investment Management Association (IMA) has published its response to FSA Discussion Paper 09/2: A regulatory response to the global banking crisis (DP09/2). DP09/2 sets out in more detail the FSA’s policy proposals contained in chapter 2 of the Turner Review.

The IMA response includes the following key points:

  • "Utility" retail and commercial banking activities need to be protected from any fall out in trading and other capital market activities.
  • This may best be achieved by applying higher capital requirements to certain types of activity, in particular the trading book.
  • Competition disciplines should be invoked to examine the now highly concentrated banking sector.
  • Regulators should encourage new participants into the capital markets where these may support depth and liquidity for investors.
  • Regulators should also generally foster more robust market structures, including focusing on better public information in the equity and fixed income markets and improved protection against counterparty default. In OTC markets, wider use of central clearing should be designed to benefit investors as well as banks.
  • The future shape of regulation also needs to be reconsidered, taking into account that conflicts exist in regulation too.

Richard Saunders, Chief Executive of the IMA, said:

"Worthwhile reforms have been introduced since the crisis broke, but more are needed. It is not a question of more or less regulation but of more effective regulation.

To achieve a more stable banking system in the future, regulation and competition must tackle, head on, the challenges of having institutions that are too big to fail. It must also deal with the risk of losses from investment banking activities undermining other activities which are the essential lifeblood of a market economy. We do not advocate mandatory separation as in the old US Glass-Steagall legislation, but instead smarter use of capital rules to achieve this.

Many of the underlying causes of the crisis were identified in the wake of the Long Term Capital Management crisis a decade earlier, but the recommendations were not acted upon. It is important this time to address these questions before memories of the crisis start to fade and the momentum of reform is lost."

View IMA responds to Turner Review, 18 June 2009