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Regulatory reform must address bank interaction
20 July 2010 at 14:32
Any regulatory reform in the financial industry must address interactions between banks, according to one sector body.
Lord Turner, chairman of the Financial Services Authority (FSA), said that the "essence" of why the financial system proved so unstable and the latest financial crisis was so great lies in the interaction between the "specific characteristics" of credit contracts, banks, real estate finance and liquid traded markets.
He noted that the regulatory reform agenda must therefore address these interactions, with two key elements at its core, namely the development of macro-prudential policy tools which "lean against the wind" of excessive credit creation and of asset-price cycles.
According to the FSA chairman, the other element must be much higher capital and liquidity requirements across the banking system and, in particular for large systemically important banks, addressing the ‘too big to fail’ belief.
Last week, Lord Turner, said that regulatory reform also needs to address more "fundamental" issues, because if the industry only focuses on banker bonuses and not the fundamental drivers of credit supply instability, it will not adequately reduce the probability of a repeat of the financial crisis.
Posted by James Harrison