FSA chief warns clamour for regulation is 'mad dog' reaction

The chairman of the Financial Services Authority, Sir Callum McCarthy, yesterday warned the Government against a "mad dog" response to concerns about the adequacy of financial regulation in the wake of the turmoil in credit markets and the run on Northern Rock.

Speaking in Washington at the annual meeting of the International Monetary Fund, Sir Callum said that the sort of knee-jerk reaction that led to the Dangerous Dogs Act of 1991, a law which Sir Callum called "unworkable", should be avoided, and that the authorities needed to be "careful not to allow that to happen in financial services".

Sir Callum, defending the UK's chief City regulator, which has been criticised for failing to prevent the Northern Rock crisis, said he did not believe the problems in the UK originated from the split of responsibilities between the Bank of England and the FSA. He said the traditional role of central banks in regulation had been superseded, and that he had "very little sympathy for the good old days" when the Bank of England could gather banks together in a "smoke-filled room". Such activity was neither "legal no practical today", he added.

Sir Callum's warning came as leading bankers met to discuss regulation and the state of financial markets. Josef Ackermann, chairman of Deutsche Bank, announced an initiative involving several leading bank groups to "refine best practices" in areas such as risk management, credit underwriting, credit ratings, off-balance sheet instruments such as "conduits" and transparency.

Further suggestions for regulatory improvement came from the president of the European Central Bank, Jean-Claude Trichet, who said: "We do not need heavy-handed public-sector regulation to achieve our goals."

Charles Goodhart, a former member of the Bank of England's Monetary Policy Committee, cautioned against "an unco-ordinated stream of legislative proposals". The proposed increase in UK deposit insurance would, he said, merely encourage high-risk banks to raise funds more easily. He urged instead that "the crucial step in the UK is to change the insolvency laws to allow control over a failing bank to be taken over quickly, if necessary by the Government, and then, in most cases, reopened immediately under new management before it has run up massive net debts and becomes deeply insolvent".

The bankers also warned about what William Rhodes, vice-chairman of Citigroup, called the "possibility of a disorderly unwinding of the global imbalances" and raised the spectre of a "disorderly environment for the dollar".

Mr Rhodes's view echoed the IMF's opinion, reiterated by managing director Rodrigo de Rato, that"in terms of the medium-term equilibrium rate, the dollar is overvalued".

Mr Rhodes added: "We cannot preclude the risk of an even more substantial slowdown in the leading industrial economies."

Mr Rhodes also threw the private sector's support behind a new G11 group of economies "comprising the current G7 club of western industrialised economies, plus China, India, Russia and Brazil". The call reflects the increasing contribution of these countries to the global economy.