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Turner calls for new Glass-Steagall approach

FSA chairman Lord Turner has backed plans to limit the risky investment trading of large banks by capital requirements rather than splitting up banks between ‘narrow’ and ‘investment’ entities.

Speaking at today’s Turner Review Conference in London, Turner argued that banks cannot be ‘too big to fail’ in the future, but said that simply splitting up their operations will only cause more instability.

He said: “Extreme narrow banking is clearly doable in practical terms, but I believe it would fail to address the most vital problem and could produce a financial system even more vulnerable to instability.”

Instead, Turner argued for the ‘new’ Glass-Steagall approach, which would limit the riskier investment activities of banks through “the active use of capital requirements” which would allow a “trade-off between greater internal separation and higher levels of whole group capital”.

He said that modern banking cannot do without more complex investment trades such as the trading of corporate securities. He said: “All of these [investment] activities, pursued on a reasonable scale and with appropriate capital backing, are an acceptable element within modern commercial banking.”

Turner also reiterated his call for the creation of ‘living wills’ for large financial institutions, as well as the need for banks to hold contingent capital or debt capital that could be converted to equity capital if certain capital ratios are breached.

He said: “The optimal policy is highly likely to include a combination of different policies, rather than searching for a non-existent silver bullet that solves our problems in one shot.”

CMS Cameron McKenna head of financial institutions and services Ash Saluja says: “Insurers, building societies and other firms should beware of Turner’s proposals. He talks about the biggest banks, but in the small print FSA says that the new living wills regime will apply to all UK deposit takers, however small. It will also apply to those insurers, life offices and other firms judged to be systemically important.”

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  1. When did Turner last visit a casino? It makes its money by making punters double up on their bets – just as he proposes ‘casino’ banks should do by taking in more capital so they can lose it. The best policy when you go into a casino is to set aside less not more capital. What we should be doing is forcing banks that want to trade proprietorial capital to reduce it not increase it. Take the chips away and the punters (banks) will lose less and be less risky.

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