Capital requirements for assets held on the trading book should be "several times" higher than at present, according to the chairman of the UK Financial Services Authority, Adair Turner.
Speaking in London yesterday, Turner echoed calls from other regulators for increased capital requirements.
"in respect to the trading books of banks, we need to remove procyclicality and to increase capital requirements not just marginally but by several times," Turner said. The current low capital requirements were out of date, he said - drawn up in a time when trading books could be expected to hold only highly liquid securities such as government bonds, rather than the less liquid structured credit products banks hold now. Turner also blamed reliance on value-at-risk, which he said was likely to produce procyclical results and ignore tail risk.
Echoing an FSA statement released on Monday, Turner said the Basel II capital adequacy rules should be revised to produce higher overall capital requirements and a more counter-cyclical outcome; banks should be encouraged to build up high levels of capital in good times and draw on them during a downturn. This would mean that at present, banks should be operating with the lowest possible levels of capital - core Tier 1 ratios of 4% and Tier 1 ratios of 6-7%, the FSA said.
Turner also called for greater emphasis on liquidity risk, more wide-ranging stress tests and a clampdown on non-bank financial institutions.
Topics: Adair Turner
More on Basel Committee
Regulators plan to floor modelled capital at a percentage of standardised approaches
Market fragility fears outweighed by benefits of new rules, says Basel chairman
Other jurisdictions will push EU to fix gaps in rules, says Basel chair
New guidelines prescribe make-up of Pillar II capital add-ons for first time
Sign up for Risk.net email alerts
Sponsored video: Tradeweb
Multifonds talks to Custody Risk on being nominated for the Post-Trade Technology Vendor of the Year at the Custody Risk Awards 2014
Sponsored webinar: IBM Risk Analytics
Nominated for two technology awards
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.