22 Jan 2009, David Benyon, Operational Risk & Regulation
LONDON - Lord Turner, chairman of the UK's Financial Services Authority (FSA), has spoken about the need for new regulatory rules and the consequences for national regulators as a result of the global financial crisis. Turner's comments at The Economist's inaugural City Lecture come ahead of his review of banking supervision and regulation, due for release in March.
The UK regulator's chairman said the 'originate to distribute' model - maligned as a cause of the current financial crisis - had a future role to play but needed reform to shed complexity and increase transparency. He said a great increase in proprietary trading over the past decade was another source of risk, adding that financial innovation had increased systemic risk for, in many cases, minimal economic gains.
He outlined three regulatory initiatives to address the root cause of the financial downturn. New approaches to capital adequacy form the first of these pillars. Counter-cyclical capital requirements are touted, together with generally much higher capital held against risky trading strategies.
The foundation of a new liquidity regime was also flagged as a key objective. Turner said this must not focus just on individual firm's liquidity but allow for a market-wide perspective.
Thirdly, Turner said financial activity must be regulated not according to its legal form but to its economic substance. This could hint about the need to create additional capital requirements above and beyond those laid out at international level by the Bank for International Settlements' Basel Committee or the European Union - neither of which are renowned for celerity in regulatory action.
Turner's March report will, he said, provide for greater clarity. The report will describe new measures already introduced by the FSA, existing proposals currently under consultation, and those where the FSA has defined objectives and will lobby for international agreement.
Click here for the full speech.