Leverage, Maturity Transformation and Financial Stability: Challenges Beyond Basel III
March 16, 2011
In a speech entitled 'Leverage, Maturity Transformation and Financial Stability: Challenges Beyond Basel III', Lord Turner, chairman of the FSA, stated that:
- that already agreed regulatory reforms will have a major beneficial impact, but further reforms are needed to make the financial system stable; and
- that regulators need to recognise that the financial system will continually mutate, creating new risks, and requiring a continually evolving regulatory regime.
Lord Turner stated three conclusions for public policy:
(i) Basel III capital standards are a major step forward, however, equity capital requirements should be set much higher - at around 15-20% of risk weighted assets.
(ii) In addition to making banks resolvable, regulators must agree equity surcharges for systemically important banks high enough to reduce the probability of failure to minutely low levels.
(iii) Financial instability can be created by shadow banking activities as much as by banks. As regulators impose higher capital and liquidity requirements on banks, there is a danger that activity will again shift to shadow banking markets and institutions, such as money market mutual funds and hedge funds.