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The Turner Review stresses the importance of regulation and supervision being based on a system-wide "macro-prudential" approach, and identifies macro-economic imbalances, financial innovation and important deficiencies in key bank capital and liquidity regulations as the underlying causes of the crises.
Alongside the Review the FSA published a discussion paper which takes an in-depth look at the causes of the financial crisis and recommends steps that the international community needs to take to enhance regulatory standards, supervisory approaches and international co-operation and co-ordination.
Deadline for responses to the FSA Discussion Paper is 18 June 2009.
The Turner Review made the following recommendations:
Ø Fundamental changes to bank capital and liquidity regulations and to bank published accounts;
Ø More and higher quality bank capital, with several times as much capital required to support risky trading activity;
Ø Counter-cyclical capital buffers, building up in good economic times so that they can be drawn on in downturns, and reflected in published account estimates of future potential losses;
Ø A central role for much tighter regulation of liquidity;
Ø Regulation of "shadow banking" activities on the basis of economic substance not legal form: increased reporting requirements for unregulated financial institutions such as hedge funds, and regulator powers to extend capital regulation;
Ø Regulation of Credit Rating Agencies to limit conflicts of interest and inappropriate application of rating techniques;
Ø National and international action to ensure that remuneration policies are designed to discourage excessive risk-taking;
Ø Major changes in the FSA’s supervisory approach, building on the existing Supervisory Enhancement Programme (SEP), with a focus on business strategies and system wide risks, rather than internal processes and structures; and
Ø Major reforms in the regulation of the European banking market, combining a new European regulatory authority and increased national powers to constrain risky cross-border activity.
The Turner Review distinguishes between those areas where the FSA has already taken action, those where the FSA can proceed nationally, and those where international agreement needs to be achieved. It also recognises that there may be alternative specific ways to achieve the essential objectives of effective regulation.
The Turner Review also highlights areas where it is premature to recommend specific action – such as in mortgages and CDS markets – but where wide-ranging options need to be debated.
"Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective”, Lord Turner said. “Major changes in regulation and in supervisory approach are required”.
Discussion Paper
Accompanying newsletter on Discussion Paper