U.K. Finance Watchdog Urges Changes
Prescriptions Include New, European-Wide Banking Regulator

By Mary Jordan
Washington Post Foreign Service
Thursday, March 19, 2009

LONDON, March 18 -- Britain's financial services watchdog on Wednesday proposed sweeping regulatory changes, including requiring banks to stockpile capital in the good times to provide cushion in the bad, increasing supervision of hedge funds and appointing a European-wide banking regulator.

The proposals come at a time when governments around the world are discussing how to make banking safer. Oversight of banks -- which in many parts of the world have nearly collapsed and required taxpayer bailouts -- is a central issue that President Obama and leaders from 20 of the world's leading economies will discuss April 2 when they meet in London to discuss remedies for the global financial crisis.

The 122-page report by the Financial Services Authority chairman, Adair Turner, notably did not recommend separating riskier investment banking from retail commercial banking. But it promised a close look at British regulation of foreign financial institutions operating in the United Kingdom.

While calling for a new European regulatory authority to set standards and oversee national supervisors, the report said that body would not supersede regulation in individual countries.

"We need both far more intense international cooperation and greater use of national powers," said Turner, who added that the "banking system of the future will be different from that of the last decade."

Turner said current laws in Europe that allow banks to operate across borders are "unsafe and untenable." The failure of Icelandic banks, for example, caused panic among their many British depositors.

But while there has been much discussion about the need for global and regional bank regulators, it remains unclear how they would operate and how much clout they would carry. Some analysts have said it would be hard for European countries to agree on a city in which to base any new banking regulatory agency, let alone agree on its powers.

"There is no doubt that some aspects of regulation and supervision have failed," said Stuart Fraser, a top official in the City of London, as the financial district is known.

He said the report would spark "detailed discussion at U.K., European and global levels" on how to have a healthier banking system.

At a time of intense focus on bankers' bonuses both in the United States and Britain, Turner's review also recommended more control over those payments to discourage excessive risk-taking.

Turner said it was difficult to measure the impact of executive bonuses on the overall crisis in global banking. But he said bonuses were "considerably less important" than other factors, such as banks not holding adequate levels of capital.

Many in the financial industry said the proposals signaled the inevitable move from "soft-touch" regulation to heavy oversight.

But Michael McMahon, who teaches economics at the University of Warwick, said the report was "not as reactionary as some people in the market feared. . . . It doesn't take the view that we can control bankers with an iron fist, and that's a positive move."

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