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News
News review
A look at the major issues of the month
by Nia Williams
T
his issue does seem to have a heavy bias was insufficient, but that we failed to piece accounting principles in published accounts.
towards regulation and government together the jigsaw puzzle of a large UK "And, very importantly, we need to address
action in the industry, mainly in reac- current account deficit, rapid credit extension issues relating to the regulation of large cross
tion to the recent attempts to kick start and house price rises, the purchase of UK border financial institutions, the realistic scope
lending and to protect homeowners. So it was mortgage backed securities by institutions for global supervisory coordination, appropri-
timely that, as we were going to press, Adair in the U.S. performing a new form of ate structures for local operations (subsidiaries
Turner, chairman of the Financial Services maturity transformation, and the potential for or branches) and the appropriate balance of
Authority (FSA), had his say. irrational exuberance in the market price of responsibility between home and host supervi-
In The Economist's inaugural City Lecture, credit. We failed to realise that there was an sors; the events of the last year – the Icelandic
Lord Turner addressed what he believed to be increase in total system risk to which financial bank and Lehmans failures in particular – have
the root causes of the current global financial regulators overall – authorities, and central taught us that we live in a world of global
crisis and set out the implications for regula- banks and in fiscal authorities – needed to finance and global banks, but where, when dis-
tion and the future shape of the financial sys- respond… aster strikes, bankruptcy procedures and fiscal
tem in a lecture in the City. He also outlined "In future regulators need to do more sec- support are national, and we need to be clear
the issues that he would deal with in his review toral analysis and be more willing to make about the implications of such a world."
of the regulation and supervision of the bank- judgements about the sustainability of whole
ing system, to be published in March. business models, not just the quality of their Initiatives
execution. Central banks and regulators He also outlined three key long-term regulatory
Originate and distribute between them need to integrate macroeconom- initiatives to reduce the probability and severity
Lord Turner said he believed the "originate and ic analysis with macro prudential analysis, and o
distribute" model of financing lending had a to identify the combination of measures which circle6
f future financial crises:
New approaches to capital adequacy, entail-
role to play in the future, but needed to be can take away the punch bowl before the party ing more capital held against risky trading
reformed, with less complexity and opacity. He gets out of hand… strategies and counter-cyclical capital
added that over the last decade the scale of pro- "Alongside that more effective macro pru- requirements to build up adequate buffers
prietary trading had created risks and that dential analysis, however, we also need more during good economic times, which can be
financial innovation had in many cases deliv- effective approaches to the regulations which
ered minimal economic value and had govern the financial system. That regulation circle6
drawn on in bad;
A new liquidity regime focused not just on
increased the dangers of financial instability. needs to be designed in the light of how the individual firms' liquidity but also on mar-
He said: "The FSA has been more open than system we are regulating is likely to evolve…
I think any institution involved in this crisis in circle6
ket-wide risk; and
Ensuring that financial activity is regulated
admitting that it made mistakes in the institu- Key elements according to its economic substance not its
tion specific supervision of northern rock. But "So let me turn finally to the key elements of legal form.
I think the best judgement is that better institu- the regulatory response required to reduce the Lord Turner said that these themes would be
tion-specific supervision of Northern Rock probability and severity of future financial outlined more fully in the Turner Report, to be
would have made only a very small difference crises, whether arising from classic on balance released in March, which will set out the
to the shape and impact of this global crisis. sheet banking or from the securitised model of changes the FSA has already made, those where
credit intermediation. The response needs to be there are proposals in principle but need con-
Failure multifaceted… which will be covered in the sultation, and those where the regulator has
"The far bigger failure – shared by bankers, reg- Review and Discussion Paper to be published defined objectives but needs to play a role in
ulators, central banks, finance ministers and in March. These include actions relating to achieving international agreement.
academics across the world – was the failure to remuneration and incentives, to rating agen- The elements of the government's interven-
identify that the whole system was fraught with cies, to counterparty risk in derivatives. They tion in the mortgage and financial markets can
market wide, systemic risk. The key problem also involve consideration of the appropriate be found on our website
was not that the supervision of Northern Rock balance between mark to market and accrual mortgageintroducer.com
February 2009 Mortgage Introducer www.mortgageintroducer.com
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