Trading book capital must be "several times" higher, FSA says

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 The current low capital requirements were out of date, he said - drawn up in a time when trading books could be expected to hold only highly liquid securities such as government bonds, rather than the less liquid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.

See also: Basel Committee prepares to raise capital requirements with 'stressed VAR' test
G-30: large banks may be too big to trade

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