Transcription of The Turner Review
1 The Turner ReviewA regulatory response to the global banking crisisMarch 2009 The Turner ReviewMarch 20091 Introduction5 Actions required to create a stable and effective banking system7 Chapter 1: What went wrong? The global story: macro trends meet financial innovation (i) The growth of the financial (ii) Increasing leverage in several (iii) Changing forms of maturity transformation: the growth of shadow (iv) Misplaced reliance on sophisticated (v) Hard-wired procyclicality: ratings, triggers, margins and UK specific developments Global finance without global government: faultlines in regulatory (i) Lehman Brothers and the future approach to global wholesale (ii) Landsbanki and the European single market: the need for major Fundamental theoretical (i) Efficient markets can be (ii) Securitisation and financial instability.
2 Inherent or fixable with better 42regulation? (iii) Misplaced reliance on sophisticated maths: fixable deficiencies or 44inherent limitations? (iv) The failure of market (v) Financial innovation and value added 47 Contents1 The Turner ReviewMarch 2009 Chapter 2: What to do? The need for a systemic Fundamental changes: capital, accounting and (i) Increasing the quantity and quality of bank (ii) Significant increases in trading book capital: and the need for 58fundamental Review (iii) Avoiding procyclicality in Basel 2 (iv) Creating counter cyclical capital (v) Offsetting procyclicality in published accounts (vi) A gross leverage ratio (vii)Containing liquidity risks: in individual banks and at the systemic Institutional and geographic coverage: economic substance not legal Deposit insurance and bank Other important regulatory (i) Credit rating agencies and the use of (ii) Remuneration.
3 Requiring a risk-based (iii) Netting, clearing and central counterparty in derivatives Macro-prudential analysis and intellectual (i) Macro-prudential analysis and (ii) Macro-prudential analysis and policy in the (iii) Macro-prudential analysis and intellectual challenge at the 85international The FSA s supervisory (i) The FSA s past (ii) The new approach: more intrusive and more (iii) Implications for resources and international (iv) Alternative divisions of responsibility for prudential and conduct of 91business supervision22 The Turner ReviewMarch Risk management and governance: firm skills, processes and Regulation of large complex banks: utility banking and investment banking Regulation and supervision of cross-border (i) Cross-border banks: the scope for and limits to increased international (ii)The European single market: more Europe or more national powers?
4 100 Chapter 3: Wider issues open Product regulation? (i) Retail product regulation: maximum loan-to-value ratios or loan to 106income ratios? (ii) Wholesale product regulation? CDS as a specific example arguments 108for and Other counter-cyclical tools (i) Varying LTV or LTI limits through the cycle? (ii) Regulating collateral margin calls to offset procyclicality? Balancing liquidity benefits against stability concerns 112 Chapter 4: Implementation and Domestic implementation and international Transition from today s macro-economic Processes for responding to this review11734 The Turner ReviewIntroduction5 Over the last 18 months, and with increasing intensity over the lastsix, the world s financial system has gone through its greatest crisisfor a least a century, indeed arguably the greatest crisis in thehistory of finance capitalism.
5 Specific national banking crises in thepast have been more severe for instance, the collapse of the USbanking system between 1929 and 1933. But what is unique aboutthis crisis is that severe financial problems have emergedsimultaneously in many different countries, and that its economicimpact is being felt throughout the world as a result of theincreased interconnectedness of the global does not mean that the economic recession which many countries in the world now face willbe anything like as bad as that of 1929-33. The crisis of the early 1930s was made worse by policyresponses which can be and are being avoided today. But it is clear that however effective thepolicy response, the economic cost of the financial crisis will be very large.
6 We therefore need to askprofound questions about what went wrong, whether past intellectual assumptions about thenature of financial risk were seriously mistaken, and what needs to be done to reduce theprobability and the severity of future financial Chancellor of the Exchequer asked me in October 2008 to Review the causes of the currentcrisis, and to make recommendations on the changes in regulation and supervisory approachneeded to create a more robust banking system for the future. This Review responds to that remit,focusing on the fundamental and long-term questions. It does not address the short-term challengeof macroeconomic management over the next few years, though it does comment on ways inwhich the transition path to new more stable arrangements must be managed in the light of thatshort-term challenge.
7 And its focus is on banking and bank-like institutions, and not on otherareas of the financial services industry. The FSA Discussion Paper which accompanies this reviewconsiders possible implications for other financial Turner ReviewIntroduction66It is organised in four chapters:1 Chapter 1 describes what went wrong, and the extent to which the crisis challenges pastintellectual assumptions about the self -correcting nature of financial 2 sets out changes to banking regulation and supervisory approaches where theprinciples of changes now required are already clear, and which the FSA plans to introduceand/or which it is proposing in international 3 describes a set of wider issues raised by the crisis, and a wider set of possiblepolicy responses which deserve 4 summarises the recommendations, distinguishes between those which can beimplemented by the FSA acting alone and those where we need to seek internationalagreement.
8 And discusses the appropriate pace and process of implementation given the starting point of today s macroeconomic summary of the Chapter 2 recommendations, and of the Chapter 3 open issues, is set out onthe following three pages overleaf. These are the actions required to create an effective bankingsystem, better able to serve the needs of the businesses and households and less likely to besusceptible to financial instability. For completeness, the summary includes actions alreadyimplemented or in course of implementation ( The FSA s Supervisory EnhancementProgramme) as well as those where further action is now of the most important next steps (for instance, those relating to the capital adequacyregime) will depend on the international agreement which Chapter 4 discusses.
9 There is alreadyconsiderable consensus within key international fora (for instance the Financial Stability Forumand the Basel Committee on Banking Supervision) on many of the principles which should governthe future regulatory regime. But there are different national points of view on preciseimplementation and phasing. It is therefore important to distinguish between the objectives ofimproved regulation and the specific ways in which objectives are achieved. Chapter 2 makes thatdistinction. It proposes some specific options to illustrate how objectives could be delivered; but itrelates these to the underlying principles recognising that final international agreements may reflectthese principles in different implementation Review is accompanied by an FSA Discussion Paper, which sets out in more detail theproposals made in Chapter Turner ReviewIntroduction7 ACTIONS REQUIRED TO CREATE A STABLE AND EFFECTIVE BANKING SYSTEMC apital adequacy, accounting and liquidity1.
10 The quality and quantity of overall capital in the global banking system should be increased,resulting in minimum regulatory requirements significantly above existing Basel rules. The transitionto future rules should be carefully phased given the importance of maintaining bank lending in thecurrent macroeconomic Capital required against trading book activities should be increased significantly ( several times)and a fundamental Review of the market risk capital regime ( reliance on VAR measures forregulatory purposes) should be Regulators should take immediate action to ensure that the implementation of the current Basel IIcapital regime does not create unnecessary procyclicality.
