City bonuses may not be closely regulated in the UK

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LONDON - Chairman of the UK Financial Services Authority (FSA) Lord Adair Turner has indicated the regulator's supervisory agenda in an interview with UK newspaper The Independent. Higher capital adequacy levels, liquidity regulation, and the supervision of off-balance sheet assets all featured strongly, but with less emphasis on direct regulation of City bonuses.

"As the process of irrational exuberance sets in, the price of those assets can go to unreasonably high levels, generating what are in a sense illusory profits and very large bonuses to the people involved in the process," said Turner. "This in turn makes bankers think they should do even more of what they have just done."

The UK's financial regulator is due to release a government-commissioned review of City supervision in March, following up on initial principles for financial compensation structures announced in a 'Dear CEO' letter of October 13, 2008.

Capital requirements on riskier products could form an alternative FSA strategy to specifically regulating remuneration. Altering capital requirements would however have knock-on effects for internationally agreed capital levels as set by the Basel Committee and into European Union (EU) law via the Capital Requirements Directive.

Turner also poured water on current EU debates on the necessity for a cross-border regulator to co-ordinate future responses to financial crises. European Central Bank (ECB) governor Jean-Claude Trichet has already said his monetary body "stands ready" for cross-border supervisory responsibilities.

"You cannot have global regulation without a global central bank and a global government with fiscal resources," said Turner. "If things go wrong, the resources that rescue banks are national central banks and governments with tax and borrowing powers. If that is the case, no sovereign government on the hook to bail out its banks is ever going to hand supervision to a global body."

Turner added that it is necessary to use existing international bodies to hammer out regulation in the short term, suggesting that "overlap" and "consensus" were more likely than long-term global regulation.

"But it will take a long time, and in terms of the immediate regulatory response, we have to do it through the architecture we have already got of overlapping international forums. We must work through these to get sufficient consensus to sign up to common standards. It is an imperfect system," said Turner. "If you are trying to run a global economy without a global government, the only way is through the scrappy, difficult process of creating global governance and standards that everyone can sign up to."

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