LONDON - BRITAIN'S financial services watchdog has proposed sweeping changes to the way banks are regulated to stop a repeat of the financial crisis, demanding greater powers on Wednesday to oversee both the 'shadow' and conventional banking systems.
Blaming an 'exaggerated faith in rational and self-correcting markets' for the global economic collapse, the Financial Services Authority recommended new rules on a wide range of issues from increased capital reserve requirements for banks to stricter controls on bankers' bonuses to discourage excessive risk taking.
Mr Turner dismissed suggestions that tougher regulation here could tarnish London's attractiveness as a global financial centre, saying the world had woken up to the fact that the individual benefits gained from lighter tough regulation were far outweighed by the collective global losses when that regulation failed.
Glass-Steagall Act again?
Some analysts have called for the introduction of something akin to the Glass-Steagall Act, which was implemented in the United States after the Great Depression, to separate what some deem 'utility' banking from 'casino' banking.
The move was favoured by Bank of England governor Mervyn King in a speech on Tuesday, but Turner argued that a clear separation was not practical.
The report, which also called for a new European regulatory body and a global agreement on how international supervisors might spot and address risks to financial stability, is likely to form the basis of Britain's position at next month's summit of Group of 20 heads of state and government from rich and developing countries in London.
'We need both far more intense international cooperation and greater use of national powers,' said FSA chairman Adair Turner, adding he believed there was a consensus among the G-20 leaders for action ahead of the April 2 meeting.
The report recommended that banks hold more and higher quality capital, with several times as much capital required to support risky trading activities.
Banks should hold a minimum core Tier 1 capital ratio, a key measure of financial strength, of 7 per cent during the peak of the economic cycle, it said. That is significantly above current British and international guidelines, which set a minimum core Tier 1 ratio of 4 per cent.
The report also recommended that authorities be given the power to gather information on all significant unregulated financial institutions in the 'shadow banking' world beyond regulated banks, including hedge funds so they can be assessed for the risk they pose to the entire system.
On compensation, Mr Turner said that regulators must integrate risk management considerations into remuneration policies to discourage bankers from 'taking excessive risks with other people's money.'
Credit ratings agencies must be regulated to ensure analytical independence from commercial pressures and to ensure that they only rate instruments 'simple enough' and with enough historic record to make consistent rating possible.
Mr Turner was commissioned by Prime Minister Gordon Brown at the height of Britain's banking sector crisis last October to produce the 122-page report. -- AP
