The Financial Services Authority (FSA) published its much-anticipated review of global banking regulation on 18 March 2009. The review analyses the events that led to the financial crisis and recommends reform based on a "macro-prudential" approach rather than focussing solely on specific firms.

The Turner Review, spearheaded by FSA Chairman Lord Turner, focuses on banking but the key areas of regulatory focus, such as capital adequacy and liquidity, are likely to have implications for insurers too. The Review identified the main causes of the crisis as being macro-economic imbalances, financial innovation "of little social value" and important deficiencies in key bank capital and liquidity regulations.

"The approach [to reform] has to build on a system-wide perspective: failure to look at the big picture was far more important to the origins of the crisis than any specific failures in supervising individual firms," Lord Turner said. "It must reflect the reality of a global financial system without a global government; we need both far more intense international co-operation and greater use of national powers."

The Review's key recommendations are:

  • more and higher quality bank capital, particularly to support risky trading activity;
  • counter-cyclical capital buffers built up in good times to be drawn on in downturns;
  • tighter regulation of liquidity;
  • regulation of shadow banking activities and credit rating agencies;
  • changes to the FSA's supervisory approach, building on the Supervisory Enhancement Programme (SEP) and focussing on business strategies and system-wide risks instead of internal processes and structures; and
  • reform of the European banking market, including a new European regulatory authority and increased national powers to constrain risky cross-border activity.

The review also touched on credit default swaps, saying a full debate was needed on how to improve regulation in this area. As a start, however, it suggested that clearing and central counterparty systems be developed to cover standardised contracts.

The full 126-page Turner Review can be accessed here.