- The Washington Times - Wednesday, March 18, 2009

LONDON (AP) - Britain’s financial services watchdog proposed sweeping changes to global banking regulations on Wednesday, including a crackdown on the “shadow banking” activities of institutions like hedge funds.

The government-commissioned banking services report recommends new rules on a wide range of issues from increased requirements on banks on holding capital to stricter controls on bankers’ bonuses to discourage excessive risk taking.

Financial Services Authority chairman Adair Turner said that the market economy remained the best means of delivering global prosperity, but major changes in regulation and supervision were required to ensure that it is focused on the needs of businesses and households rather than taking risks for quick return.

The report embraces actions necessary in Britain and also discusses those that would require international cooperation. Britain will host an April 2 summit of the Group of 20 rich and developing countries that will discuss ways to address the world financial crisis, including more regulation.

“We need both far more intense international cooperation and greater use of national powers,” Turner said as he released the report.

“The changes recommended are profound and the banking system of the future will be different from that of the last decade,” he said.

The report recommends that banks hold more and higher quality capital, with several times as much capital required to support risky trading activities. It also suggests setting countercyclical capital buffers to build up a funding pool in good economic times so it can drawn on in times of economic downturn.

The report also recommended that authorities be given the power to gather information on all significant unregulated financial institutions, including hedge funds so they can be assessed for the risk they pose to the entire system.

It added that regulators should have the power to impose restrictions on these institutions if they develop “bank-like features that threaten financial stability.”

Offshore financial centers should be covered by global agreements on regulatory standards, it added.

The FSA also recommends the creation of a new European regulator that will act as a standard setter and supervisory coordinator.

Turner said that current laws in Europe that allow banks to operate across borders are “unsafe and untenable,” noting the ripples caused by the failure of Icelandic retail bank Landsbanki last year.

Prime Minister Gordon Brown has talked of “massive changes” in the supervisory system and Turner, who has been spearheading the review since taking up his post in September, has promised a “revolution” in banking regulation.

Turner told lawmakers last month that the FSA was prepared to outlaw risky mortgages and investment banking products.

He also wants to significantly increase the amount of capital banks are required to hold to set against risky trading strategies.

The report comes on the heels of the weekend meeting of G-20 finance officials, where they signed off on a communique that called for “full and transparent disclosure” of toxic debts and banks’ bad assets.

The group, which represents more than 80 percent of the global economy, also advocated the registration of hedge funds, saying they should “disclose appropriate information on the risks they pose.”

Turner is also expected to propose better coordination between the three bodies that currently make up Britain’s tripartite structure of regulation _ the Treasury, the Bank of England and Financial Services Authority _ which Brown instituted when, as Treasury chief, he gave the bank operational independence in 1997.

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