Sept. 29 (Bloomberg) -- Regulators may need to use unconventional policy tools to ensure banks don’t cause another credit boom and financial crisis, a top U.K banking regulator said today.
Adair Turner, chairman of Britain’s Financial Services Authority, said in a speech to students that supervisors “may need to be still more radical” in regulating banks’ trading of complex financial products. Turner also called for minimum ratios for measuring risk, known as risk weights, to be applied globally as part of the Basel Committee on Banking Supervision’s rules on bank reserves.
“We need to challenge the idea that financial innovation is axiomatically beneficial in a social as well as private opportunity sense,” Turner said. “Much of it focuses on the zero-sum activity of tax avoidance.”
European policy makers have released a series of rules regulating banks’ trading of derivatives, short-selling and bonuses in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008 and the financial crisis, the worst since the Great Depression, that followed.
The Basel Committee, a group comprised of global regulators and central banks, has agreed on measures including a 2.5 percent capital surcharge on large banks and tougher liquidity rules.
Turner said regulators need to be wary of the so-called shadow banking system and they should “challenge the idea that the bigger the financial system is the better.”
The shadow-banking system, which includes structured investment vehicles used to move transactions off companies’ balance sheets, had liabilities of about $16 trillion in the first quarter of 2010, according to the Federal Reserve Bank of New York.
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