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UK FSA's Turner:'No Silver Bullet' To Address 'Too-big-to-fail' Challenge (RTTNews) - There is no 'silver bullet' to address the problem of banks being 'too-big-to-fail', instead the answer lies in a combination of different policies between which trade-offs can be made, said Adair Turner, the Chairman of UK's Financial Services Authority on Monday. "Over the last two years, when large banks deemed systemically important have been in danger of failure, only one model of rescue has been followed - government capital injections and guarantees to keep the entire existing bank safe as a going concern, with equity holders losing because of dilution, but all other fund providers, including debt capital providers, protected," he said at the FSA's Turner Review Conference. This 'too big to fail' status creates three categories of concern - the moral hazard problem, the cost to the fiscal authorities and the danger that in some countries banks may be too big for the authorities to rescue. Addressing 'narrow bank' proposals which seek to separate utility banking from casino banking, Turner argued that an extreme narrow banking model, with retail banks investing only in government securities, was certainly practical but failed to address the crucial issue of booms and busts in credit supply and as a result, could actually increase financial instability. But he suggested that the objectives behind a 'new Glass Steagall' distinction between commercial banks and proprietary trading were desirable and could be pursued by appropriate capital requirements and the use of resolution and recovery plans to drive internal distinctions between retail and trading activities. "It is essential to progress this argument beyond the top line slogans, for or against narrow banking, and get down to details," Turner said. "The extreme narrow banking proposal is clearly doable in practical terms, but I believe could produce a financial system even more vulnerable to instability than the one we have today." Moreover, Turner said a crucial issue for large cross-border banks was the appropriate balance between regulatory focus on whole group capital and liquidity versus focus on the soundness of standalone national subsidiaries. He argued that the more standalone approach could be an answer to the "too-big-to-rescue" challenge. |
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