Banking rules are not strong enough, warns FSA's chairman

Adair Turner also calls for a greater focus on risks of the 'shadow banking' system

The much-trumpeted reforms to international banking regulations are not enough to ensure financial stability, the chairman of the Financial Services Authority (FSA) said last night.

The head of the soon-to-be-dismantled financial watchdog said that in an ideal world Basel III would have required banks to have core capital of 15 - 20 per cent, rather than the 7 per cent it specifies, but regulators have had to keep clear of rules that might slow down the economic recovery.

In the same vein, Lord Turner added that while it was desirable to deal with banks that were too big to fail by making sure that there were ways to impose losses on debt holders, current plans were not "sufficient to address risks of systemic instability".

Moreover, he said rulemakers needed to take a closer look at the risks attached to the so-called "shadow banking" system populated by hedge funds. Fixating on traditional banks alone would leave the door open for another crisis, he said in a speech at City University's Cass Business School.

"The pre-crisis delusion was that the financial crisis, subject to the then-defined rules, had an inherent tendency towards efficient and stable risk dispersion," he said. "The temptation post-crisis is to imagine that if we can only discover and correct the crucial imperfections – the bad incentives and structures – a permanent, more stable financial system can then be achieved.

"It cannot, because financial instability is driven by human myopia and imperfect rationality as well as by poor incentives, and because any financial system will mutate to create new risks in the face of any finite and permanent set of rules," he added.

The FSA chairman's comments come less than a week after Axel Weber, the European Central Bank member and the head of Germany's Bundesbank, highlighted the need to deal with the wider financial system, not just banks. "We need to shine some light into the shadow banking system," Mr Weber told students at University College London.

"Basel III and special rules for systemically important institutions are certainly important instruments in safeguarding the stability of the financial system," Mr Weber said. "However, the best dyke is of little use when there is a whole ocean at our back."

Speaking last night, Lord Turner added his voice for greater attention on the farther reaches of the financial sector. "Since the crisis, global regulators have focused primarily on capital and liquidity requirements for banks, both in general... and for big banks in particular," Lord Turner said. "But the initial year of the crisis, 2007 to 2008, it did not seem like a familiar banking crisis, but something entirely new, a crisis of 'shadow banking'."

When it comes to the traditional banks that are too big to fail, Lord Turner said it was important to ensure that were mechanisms were in place to ensure that authorities can impose losses on all debt holders so that problematic institutions may be recapitalised without resorting to taxpayer support. Equally, it was important to ensure that the banks themselves can absorb losses.

But such measures alone cannot provide protection against the sort of systemic meltdown seen during the dark days of the recent crisis. Other steps, such as equity surcharges on the biggest banks, should be pursued, he argued. The possible break-up of the biggest banks – the pros and cons of which are being looked into by the Independent Commission on Banking – should also be considered, Lord Turner said. "For the UK, with major banks which are very large relative to our GDP, a key policy objective for this year is to ensure that Financial Stability Board decisions on systemically important financial institutions result in higher-than-Basel III equity requirements for most systemically important banks."

He added it was important to keep a closer tab on the industry to ensure rules keep pace with systemic shifts.

Start your day with The Independent, sign up for daily news emails
Life and Style
A monstrous idea? Body transplants might no longer be science fiction
Science An Italian neurosurgeon believes so - and it's not quite as implausible as it sounds, says Steve Connor
Sport
Demba Ba (right) celebrates after Besiktas win on penalties
footballThere was no happy return to the Ataturk Stadium, where the Reds famously won Champions League
Arts and Entertainment
Natural beauty: Aidan Turner stars in the new series of Poldark
arts + ents
News
Mia Freedman, editorial director of the Mamamia website, reads out a tweet she was sent.
arts + ents
News
people
Arts and Entertainment
The write stuff: masters of story-telling James Joyce, left, and Thomas Hardy
arts + ents...begging to differ, John Walsh can't even begin to number the ways
News
Image from a flyer at the CPAC event where Nigel Farage will be speaking
news
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Telesales / Marketing Executive - B2B - OTE £25,000

£17000 - £25000 per annum: Recruitment Genius: An opportunity to join this new...

SThree: Trainee Recruitment Consultant

£18000 - £21000 per annum + OTE £45,000: SThree: SThree Group have been well e...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Recruitment Genius: Business Control Manager

£36000 - £44000 per annum: Recruitment Genius: Encouraging more businesses to ...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower