Today, the U.K.’s Financial Services Authority (FSA) announced that it has published the “Turner Review” of global banking regulation, named for the FSA’s chairman. The Review identifies three underlying causes of the crisis:
- Macro-economic imbalances
- Financial innovation of “little social value”
- Important deficiencies in key bank capital and liquidity regulations
The Review stresses “the importance of regulation and supervision being based on a system-wide ‘macro-prudential’ approach rather than [focusing] solely on specific firms.” In particular, the Review recommends:
- Fundamental changes to bank capital and liquidity regulations and to bank published accounts;
- More and higher quality bank capital, with several times as much capital required to support risky trading activity;
- Counter-cyclical capital buffers, building up in good economic times so that they can be drawn on in downturns, and reflected in published account estimates of future potential losses;
- A central role for much tighter regulation of liquidity;
- Regulation of “shadow banking” activities on the basis of economic substance not legal form: increased reporting requirements for unregulated financial institutions such as hedge funds, and regulator powers to extend capital regulation;
- Regulation of Credit Rating Agencies to limit conflicts of interest and inappropriate application of rating techniques;
- National and international action to ensure that remuneration policies are designed to discourage excessive risk-taking;
- Major changes in the FSA’s supervisory approach, building on the existing Supervisory Enhancement Programme (SEP), with a focus on business strategies and system wide risks, rather than internal processes and structures; and
- Major reforms in the regulation of the European banking market, combining a new European regulatory authority and increased national powers to constrain risky cross-border activity.
The Review also mentions areas “where it is premature to recommend specific action, but where wide-ranging options need to be debated,” including “product regulation in retail (e.g. mortgage) and wholesale (e.g. CDS) markets.”
Last month, the FSA published a draft code of practice on remuneration policies.