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• Turner: changes would not have stopped Goodwin scandal
• 122-page report reviews the events that caused the crisis
• European banking regulation is 'unsafe and untenable'
Lord Turner today blamed an "exaggerated faith in rational and self correcting markets" for the financial crisis as he set out wide-ranging changes to the way banks are regulated, but insisted the Financial Services Authority should continue to oversee the troubled sector.
In a 122-page review of the events that caused the crisis and remedies designed to prevent it happening again, the FSA chairman sets out several areas for change, including the need for a new European regulator. He made it clear that the current European system is "unsafe and untenable".
But he admitted that his proposed changes would not have prevented the collapse of Northern Rock or the £16.9m pension pot awarded to Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland.
His report was launched as the FSA embarked on a new review of remuneration policies in the banking sector to ensure that bankers are not encouraged to take too much risk to earn big bonuses. The FSA is setting out principles about pay and how to implementthem.
Turner argues that banks with big trading operations could need three times more capital than they currently have and that hedge funds and other firms that behave like banks should also be regulated as banks.
"If an activity looks like a bank and sounds like a bank we will regulate it like a bank," said Turner.
In a blunt assessment of the failings of the regulatory system, Turner said: "We need to make the banking system a shock absorber in the economy not a shock amplifier."
The FSA will need to make a "major shift" in its regulation, he said. The whole philosophy of the FSA needs to be changed and is two thirds through that process. Turner said: "The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets. Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective".
The FSA and the Bank of England will need to be "intensively and collaboratively" involved in looking at macroeconomic issues and if necessary "take away the punch bowl before the party gets out of hand".
Turner was asked to embark upon the review by Alistair Darling. It steps back from making specific changes on the way products such mortgages should be regulated.
The much anticipated review might disappoint those who were expecting radical changes such as the introduction of the Glass-Steagal act - implemented in the US after the Great Depression - which separates retail banking from more riskier investment banking. Such a move was favoured by Bank of England governor Mervyn King in a speech last night. Turner believes such a separation is not practical.
- Banking
- Regulators
- Banks and building societies
- Borrowing & debt
- Mortgages
- Economic policy
- Financial crisis
- Sir Fred Goodwin
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