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'Rules need to cover shadow banking'

Lord Turner, the chairman of City watchdog, the Financial Services Authority last night blamed the "shadow banking" sector as being a significant contributor to the financial crisis.

Lord Turner said that shadow banking – which includes institutions and activities such as securitised lending, hedge funds active in credit markets and investment bank trading of credit securities – continues to pose risks to financial stability and needs to be properly regulated.

"In autumn 2008, the developed world's banking system suffered a severe crisis. And since then the world's regulators and central banks have focused on building a more stable banking system for the future: less leverage, more liquid, better supervised and with even the largest banks able to be resolved without taxpayer's support," Lord Turner said.

"But it's striking that the crisis did not initially seem to be one of banks themselves, but rather of an apparently new phenomenon: shadow banking. So we need to ensure that our regulatory response appropriately covers shadow banking as well as banks," he added.