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Turner: Iceland highlighted flawed supervision of cross-border banks

FSA chairman Lord Turner believes the flawed supervision of cross-border banks in the European Union needs to change in order to tackle those banks that are too big for smaller countries to bail out.

Speaking at the City of London Corporation’s annual reception for the City Office yesterday, Turner said that the Icelandic bank collapse acted as a wake-up call for Britain that larger banks from smaller European Economic Area countries can be ‘too big to rescue’.

The Icelandic banks fell under the spotlight last year after aggressively gathering internet deposits in a number of EEA countries, only for both the Icelandic Deposit Insurance Scheme and the Icelandic government to be lacking funds to support depositors in those troubled banks.

Turner said: “For us in Britain this was a wake-up call. Our past approach to European financial services integration had been largely to argue that Europe should extend single market freedoms while limiting to the absolute minimum pan-European regulatory integration and supervisory integration. After the crash, it was obvious that that philosophy had to change.”

Turner said that reforms would create a European Systemic Risk Board, which would look to spot trends in, and threats to, the financial system.

He said: “it could play a very useful role. One of the most crucial things that went wrong in the run-up to the crisis was that the global central banking and regulatory community, those in different ways responsible for financial stability, failed to see the big picture of emerging financial risks: the regulators too exclusively focused on institution by institution threats, and the central banks too exclusively focused on meeting the sole objective of low and stable inflation over the medium term.”

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