The long awaited Turner Review into the regulatory response to the global banking crisis has been published. The key headlines are as follows.


The paper goes into the background to the crisis (which largely follows Lord Turner's speech on this subject in January); proposals for reform; and the means by which change might best be effective. It is superb at the overview level, and we have rarely seen journalists so impressed by the handling of such a complex subject by a civil servant. The proposals contains a detailed timetable of measures.


  • The quality and, in particular, quantity of overall capital in the banking system must be increased.
  • Capital required against trading book activities should be increased by at least a factor of 3.
  • Regulators should take counter-cyclical measures, requiring more capital to be kept in good times.
  • Authorities should not yet regulate hedge funds, but should have the power to gather information on the risks that they pose and to regulate them if it becomes necessary.
  • Credit rating agencies should be regulated.
  • Remuneration policies must underpin not undermine stability.
  • Central counterparty and clearing systems should be developed for CDS trading.
  • Whilst integrated investment banks should continue, Lord Turner's measures will focus banks' attention on traditional activities, rather than exotic ones. In particular, banks will be discouraged from risk-taking proprietary trading.
  • A new European institution should be created covering all regulated sectors and have an advisory role in helping national supervisors (a supervisor of supervisors). Supervision should continue to be lead at a national level.
  • The current EU passported branch arrangements are untenable and require increased national powers over liquidity, including forcing branches to become subsidiaries.
  • European deposit protection rules should be reformed and deposit protection should be pre-funded.


Lord Turner accepts that these measures will make banks less profitable. That is a shame given that the key British banks are now owned by the tax payers.

It is interesting that Lord Turner thinks that risk-taking investment banking activities cannot sensibly be divorced from traditional deposit taking activities. In essence, he seems to see this problem as too difficult to solve. That is not the traditional Turner approach to a problem. His view seems to be that intrusive regulation will drive banks in this direction anyway, and that running internal hedge funds will no longer be seen as an attractive option. It is somewhat surprising he does not propose legislation in this regard.

Lord Turner is on record as saying we either need "more Europe or less, just not the current amount". The paper actually proposes both more and less European regulation. On the one hand, Lord Turner wants a single European supervisor of supervisors. His paper sometimes suggests that a more powerful European regulator is needed, rather than a more powerful supervisory talking shop. But politically, the UK remains no way near backing a single European regulator, unlike some influential industry associations such as the ABI. On the other hand, Lord Turner suggests home countries should be allowed to require branches to be turned into subsidiaries so that they can be regulated at a local level. This is completely contrary to the EU co-operative model, and would threaten to undermine the single market in the eyes of may European countries. It is also interesting that Lord Turner does not back the de Larosiere report recommendation that 3 single supervisors of supervisors, with powers to direct action by national regulators, should be established.

Lord Turner still sees the future for a single regulator in charge of both prudential supervision and conduct of business requirements. The Conservative Party are likely to propose the opposite at the next election. Lord Turner's proposals for greater involvement of the Bank of England in assessing micro economic risks are sound and are likely to receive widespread support.

Lord Turner's conclusions on hedge funds are somewhat surprising. He says "Hedge funds in general are not today bank-like in their activities … and are not therefore at present performing a maturity transformation function". He explains that hedge funds could, however, evolve (rather like investment banks did from the 1980's onwards) to play a more important role, and therefore that hedge fund activities should be kept under review so that regulation can be introduced if needed. Many politicians have been clamouring for full regulation of hedge funds now.

Lord Turner's view is that the FSA must be "more intrusive and more systemic" in its approach to the regulation of banks. Although the industry knew that this was coming, it hardly makes comfortable reading. It may, however, encourage non-banking functions to be spun-off and carried out in non-banking entities.

It is interesting that Lord Turner wants more time to consider whether FSA's should get involved in product regulation, such as limiting Loan To Value limits on mortgages. Surely FSA's should have some view on this matter at this stage?

On short selling, Lord Turner effectively accepts that this is not a market abuse issue, but may be of importance in relation to the maintenance of "orderly markets and financial stability", presumably suggesting the FSA should be given new powers in relation to short selling.

Finally, it is noteworthy that even Lord Turner cannot miss out on a dig at Sir Fred Goodwin, saying (when considering the inability of non-executive directors to challenge boards) "this has demonstrated the vital importance of non-executive challenge to dominant chief executives pursuing aggressive growth strategies".  

The report is likely to be highly influential, both in the UK and abroad, not least in the challenging timetable within which change is to be achieved.