The financial innovation of the past decade has delivered minimal economic value and increased financial instability, according to the FSA's chairman.
Speaking at The Economist's City lecture, Lord Turner outlined a number of reforms needed in the banking system to prevent future financial crises.
He delivered a damning verdict on the 'originate and distribute' model of financing, where lenders packaged up loans to be sold on to investors, effectively keeping their liabilities off their balance sheet.
The model has failed to deliver economic benefits in many cases, he says, while creating a number of risks that increased the dangers of financial instability.
He believes this business model does have a role to play in the future, but with significant reforms to encourage greater transparency and less complexity.
To deal with the problems seen in recent months, Turner has outlined some key regulatory initiatives to reduce the chances of a similar crisis hitting British banking in the future.
The FSA will look to force banks to maintain greater capital adequacy, holding more capital against risky strategies and more counter-cyclical requirements.
A new liquidity regime will focus on both individual firms and market-wide risks, while financial activity will be regulated according to its "economic substance, not its legal form."
The initiatives will be outlined in full as part of the Turner Report, due to be published in March.
Contact: John Bakie, Tel: 020 7484 9805, e-mail: [email protected]IFAonline
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