Lord Adair Turner, chairman of UK financial regulator the Financial Services Authority (FSA), said yesterday that the Financial Stability Board is “in full agreement” with the US about how to limit deposit-taking banks’ proprietary trading activities.
Turner’s comments come amid a sense that the US president Barack Obama’s administration is acting alone with the Volcker rule, a controversial proposal by former Federal Reserve chairman Paul Volcker to prevent deposit-taking institutions from running proprietary trading desks and investing in private equity or hedge funds.
The Financial Stability Board (FSB) is an organisation set up in April 2009 to promote stability in key financial centres. Members include the central banks of 24 countries. Turner is chairman of the FSB’s Standing Committee for Supervisory and Regulatory Co-operation.
Addressing a Treasury Select Committee hearing into tackling ‘too big to fail’ institutions, Turner said that while regulators efforts to prevent future crises should not focus solely on specific types of banks, pointing out that Lehman Brothers was not a deposit-taking institution, he contended that there are arguments for limiting deposit takers’ prop trading where it is unrelated to customer service.
“The issue is what means can achieve that objective,” said Turner. “Having discussed this with Paul Volcker, I believe we are in full agreement on the means and that capital requirements for trading activities will be key.”
He added that he hoped the issue could be discussed at the hearing because “I believe the idea that there is some fundamental divergence between the Volcker proposals and the way the FSB is addressing this issue, is a confusion in an important debate.”
Turner is known to favour capital restrictions to limit banks’ prop trading. The Turner Review, written by Turner and published by the FSA on 18 March last year, called for new capital and liquidity requirements “to constrain commercial banks’ role in risky proprietary trading activities”.
The Volcker rule has faced heavy criticism since its announcement on 21 January from both within and outside the US, in particular because it lacks a clear definition of what type of proprietary trading it seeks to restrict.
On 1 February, David Wright, deputy director-general at the European Commission’s internal market division, told a London audience that European officials had been given no prior warning of the announcement of the Volcker rule and cast doubt on its wider applicability.
In a speech at a London conference on 3 February, Paul Myners, the financial services secretary to the UK Treasury, said that the activities covered by the Volcker rule played little part in the financial crisis, and criticised the proposal’s lack of detail.