Banking regulator calls for clean slate

Financial Times
By Peter Thal Larsen, Banking Editor
Published: October 16 2008 23:30 Last updated: October 16 2008 23:30
Financial regulators should be prepared to “wipe the slate clean” as they search for a more effective global regime in the wake of the credit crisis, the chairman of Britain’s financial watchdog has said.
Lord Turner of Ecchinswell, who took over as chairman of the Financial Services Authority last month, said regulators should be prepared to engage in a fundamental debate about how to set banks’ minimum capital requirements following state banking bail-outs in Europe and the US.
“When you’ve been through a crisis like this, it’s rather sensible to wipe the slate clean in terms of all your previous assumptions,” he said in an interview with the Financial Times.
Lord Turner also warned banks and insurance companies regulated by the FSA they would have to pay higher fees so the regulator could strengthen its supervision of institutions that pose a potential risk to the stability of the financial system.
“Bluntly, we have been doing supervision on the cheap,” Lord Turner said, arguing that the number of FSA supervisors monitoring large banks was much smaller than in the US.
His comments come after the FSA, along with the government and the Bank of England, forced a recapitalisation of Britain’s largest banks last week. The move has raised questions about the future of Basel II, the international framework for setting banks’ capital reserves.
Lord Turner said the rescues, while radical, were necessary and had helped avert an economic crisis. “Although there are still going to be macro¬economic consequences of what has occurred, I think we are past the point of the danger of where we were last week, where we could have had a fundamental systemic meltdown of the core plumbing of the world financial system.”
Lord Turner said regulators would also now have to examine mark-to-market accounting, bankers’ bonus structures, the way in which financial institutions transfer risks, and the frameworks for regulating banks’ liquidity and capital.
He said the capital reserves imposed on banks last weekend were necessary to restore short-term confidence, and that the watchdog would have to work on a longer-term framework for setting capital.
He warned, however, that it could be some time before an international agreement could be reached. Some regulators believe it is necessary to scrap the Basel II framework, while others believe it can be adapted.
He said the FSA would have to hire more people and be prepared to pay some higher salaries than it had in the past. “We are going to have to do supervision at the quality that is required to do it really well. If that means the total cost has to go up somewhat then it has to go up.”