Wednesday, 18 March 2009

The Turner review

The FSA's regulatory response to the global banking crisis is out: see here.

My first reaction is that it is fairly sensible. Some highlights:
  • Section 1.1 is a really nice summary of the development of the crunch.
  • There is an interesting, and perhaps surprising, insistence on the inadequacy of current transnational arrangement to cope with global banking groups. A quote from Mervin King sets the tone: The essence of the problem ... is that global banking institutions are global in life, but national in death. There is then surprisingly strong language on the inadequacy of current arrangements: Until and unless there is a willingness to change this approach and to move to a much more unified approach to global financial supervision and even fiscal support, mechanisms such as colleges of supervisors can make an important but still limited contribution... they cannot deliver fully integrated global supervision.... On European arrangements, the tone is similarly harsh: The crisis has shown the philosophy [of European supervisory arrangements] to be inadequate and unsustainable for the future... It is essential that the European Union now considers the appropriate way forward. This willingness to contemplate radically new arrangements is definitely positive.
  • There are seven key suggestions on changes to the FSA regulatory regime. Several are unsurprising and have been suggested by FSA or the BCBS already. Thus bank capital requirements will go up, with trading book capital requirements in particular increasing. There will be a bigger focus on core Tier 1, and a gross leverage ratio backstop.
  • Turner goes further than I had thought that he would in embracing anti-cyclical capital, and anti-cyclical reserving. This is a big change for a major regulator and is definitely to be applauded.
  • As expected, the status of liquidity risk increases, with consideration being given for the first time to an overall core liquidity ratio which would limit firm's appetite for liquidity risk.
  • Turner has come down firmly on the side of regulatory consistency regardless of legal form. He says: regulation should focus on economic substance not legal form. Off-balance sheet vehicles which create substantive economic risk... must be treated as if on-balance sheet for regulatory purposes. Prudential oversight of financial institutions should ideally be coordinated in integrated regulators (covering banks, investment banks and insurance companies)... And regulators must have the power to obtain information and identify new forms of financial activity which are developing bank-like characteristics, and if necessary to extend prudential regulation to them, or to restrict their impact on the regulated community. For the avoidance of doubt, this means hedge funds too.



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