Excessively complex products that cannot be understood or overseen by regulators should be banned, according to Paul Tucker, deputy governor for financial stability at the Bank of England.
Speaking at the FSA’s Turner Review Conference in London last Friday, he also warned future regulators to be vigilant against relaxing liquidity buffers, even if they are never used, due to the confidence they provide.
Meanwhile, international regulators should think of risk in terms of capacity, according to economist Avi Persaud. Speaking at the same event, Persaud highlighted that risk could increase or decrease purely by virtue of where it resided. He said institutional investors were well-suited to taking liquidity risk, while banks were well-suited to taking credit risk, but that financial innovations had led to risk being transferred in the opposite direction.
He also warned against innovations that hide risk, stressing that risk must be visible to be effectively managed. But Peter Sands, chief executive at Standard Chartered Bank, said that this was easier said than done: risks could morph from one type of risk into another very easily and tended to accumulate where risk management was weakest.
Persaud blamed mark-to-market accounting for distorting the behaviour of financial institutions. He proposed “mark-to-funding” accounting, to be used in conjunction with mark-to-market, to empower firms to take on the risk to which they are best suited.
Adair Turner, chairman of the FSA, reiterated the concerns about European passporting rights that he had expressed in his Review. Calling the rights “unsafe and untenable”, he wanted changes to international treaties to resolve the problem.
He called for the creation of a new European institution to regulate and co-ordinate standards, into which the existing Lamfalussy Committees would be folded. National regulators should be given more power to restrict the aggressive growth of retail deposit taking branches, while Europe-wide deposit insurance should also be considered, he said.
Alistair Darling, UK Chancellor of the Exchequer, gave the keynote address, in which he reaffirmed his commitment to private sector banking, which, he stressed, had delivered many positive innovations.
Speakers were unanimous in rejecting a return to Glass-Steagall type separation of bank activities as irrelevant for the modern age. Tharman Shanmugaratnam, Singapore’s Minister for Finance, said that this debate asked the wrong question: “Liquidity risk is now the key, not credit risk,” he said.
In any case, he said, banks were now so interconnected that it would be impossible to separate the risks into different types of banks.
By Solomon Teague