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Lord Turner, chairman of the FSA, addressed the root causes of the current global financial crisis and set out the implications for regulation and the future shape of the financial system.
Lord Turner also outlined the issues that he would deal with in his review of the regulation and supervision of the banking system, to be published in March.
The “originate and distribute” model of financing lending had a role to play in the future, but needed to be reformed, with less complexity and opacity, Turner said.
The three key long-term regulatory initiatives to reduce the probability and severity of future financial crises include:
Ø New approaches to capital adequacy, entailing more capital held against risky trading strategies and counter-cyclical capital requirements to build up adequate buffers during good economic times, which can be drawn on in bad;
Ø A new liquidity regime focused not just on individual firms’ liquidity but also on market-wide risk; and
Ø Ensuring that financial activity is regulated according to its economic substance not its legal form.