Lord Turner suggests banks dubbed too big to fail should be required to hold more capital than new thresholds agreed by the Basel committee on banking supervision.
Lord Turner, chairman of the Financial Services Authority, warned tonight (16th March) that the financial system faces new risks despite the global regulatory overhaul in the wake of the banking crisis.
His words come amid renewed fears about stability in the eurozone after Moody's cut Portugal's credit rating, and analysts warned the country could follow Greece and Ireland in seeking a bailout.
Speaking at the Cass Business School in London, Turner warned against complacency, saying: "We are deluding ourselves if we think there is any one policy – one silver bullet – which will permanently ensure a more stable system."
Turner called for careful control of shadow banking – the hedge fund, derivatives and private equity industries – to ensure new risks do not emerge outside mainstream banking.
He suggested systemically important firms, the banks dubbed "too big to fail", should be required to hold more capital than new thresholds agreed by the Basel committee on banking supervision.
Turner said: "(We) should identify whether financial activities are shifting to new institutions and markets. If in response to Basel III, credit extension moves to new shadow bank markets and firms, for instance to hedge funds, and within those markets and firms we are aware of bank-like risks, such as high leverage, we need to spot that and if necessary extend the reach of regulation."
The FSA chairman stopped short of calling for the break-up of big banks by ordering them to separate their retail arms from their more risky investment banking operations. But he threw his weight behind a review of the issue by the banking commission, which is due to report in September.
Turner said the commission under Sir John Vickers should not be constrained by any assumption that the "present complex structures of banks always deliver vital social benefits – too often indeed, they reflect the objectives of tax avoidance and regulatory arbitrage." But he added that breaking up large banks might not be a panacea, since risks could also arise from the complex inter-connectedness of many small banks.
Looking at the pitfalls of future regulation of the City, Turner said the pre-crisis delusion was that the financial system was secure because risk was widely spread among scores of financial institutions. That proved to be entirely wrong.
"But the temptation post-crisis is to imagine that if we can only discover and correct the crucial imperfections – the bad incentives and structures – a permanent, more stable financial system can be achieved. It cannot, because financial instability is driven by human myopia and imperfect rationality as well as by poor incentives; and because any financial system will mutate to create new risks."
Turner said the system could be made more stable, but it required a continually evolving regulatory response. "For the very fact of imposing stricter regulations will induce changes, requiring new regulatory responses."
The FSA chairman's speech came after a turbulent day in Europe, with Moody's downgrading Portugal's credit rating to just four notches above "junk".
Analysts said there was a real danger the Portuguese government would be unable to implement austerity measures, and the country would be forced to go cap in hand to the EU for emergency funding.
Source: www.guardian.co.uk
Lord Turner, chairman of the Financial Services Authority, warned tonight (16th March) that the financial system faces new risks despite the global regulatory overhaul in the wake of the banking crisis.
His words come amid renewed fears about stability in the eurozone after Moody's cut Portugal's credit rating, and analysts warned the country could follow Greece and Ireland in seeking a bailout.
Speaking at the Cass Business School in London, Turner warned against complacency, saying: "We are deluding ourselves if we think there is any one policy – one silver bullet – which will permanently ensure a more stable system."
Turner called for careful control of shadow banking – the hedge fund, derivatives and private equity industries – to ensure new risks do not emerge outside mainstream banking.
He suggested systemically important firms, the banks dubbed "too big to fail", should be required to hold more capital than new thresholds agreed by the Basel committee on banking supervision.
Turner said: "(We) should identify whether financial activities are shifting to new institutions and markets. If in response to Basel III, credit extension moves to new shadow bank markets and firms, for instance to hedge funds, and within those markets and firms we are aware of bank-like risks, such as high leverage, we need to spot that and if necessary extend the reach of regulation."
The FSA chairman stopped short of calling for the break-up of big banks by ordering them to separate their retail arms from their more risky investment banking operations. But he threw his weight behind a review of the issue by the banking commission, which is due to report in September.
Turner said the commission under Sir John Vickers should not be constrained by any assumption that the "present complex structures of banks always deliver vital social benefits – too often indeed, they reflect the objectives of tax avoidance and regulatory arbitrage." But he added that breaking up large banks might not be a panacea, since risks could also arise from the complex inter-connectedness of many small banks.
Looking at the pitfalls of future regulation of the City, Turner said the pre-crisis delusion was that the financial system was secure because risk was widely spread among scores of financial institutions. That proved to be entirely wrong.
"But the temptation post-crisis is to imagine that if we can only discover and correct the crucial imperfections – the bad incentives and structures – a permanent, more stable financial system can be achieved. It cannot, because financial instability is driven by human myopia and imperfect rationality as well as by poor incentives; and because any financial system will mutate to create new risks."
Turner said the system could be made more stable, but it required a continually evolving regulatory response. "For the very fact of imposing stricter regulations will induce changes, requiring new regulatory responses."
The FSA chairman's speech came after a turbulent day in Europe, with Moody's downgrading Portugal's credit rating to just four notches above "junk".
Analysts said there was a real danger the Portuguese government would be unable to implement austerity measures, and the country would be forced to go cap in hand to the EU for emergency funding.
Source: www.guardian.co.uk
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