Regulatory Response To The Global Banking Crisis Finance Essay

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The world is now recovering from the serious financial crisis. In retrospect of what the world banking system suffered, the chairman of FSA, Turner, proposed a series of actions and presents them in his review-- "A regulatory response to the global banking crisis" (FSA, 2009).

This essay aims to review and evaluate these proposed actions in the Turner's Review in the light of both the academics' perspective from the existing literature and public opinions mainly collected from newspapers.

All detailed discussions about the efficiency and effectiveness of the each action, the corresponding expected results and some further suggestions for improvement will be presented in the main body of the essay followed by final conclusions.

II Discussion and Expected Results

Capital, accounting and liquidity

Capital Adequacy

Increase both the quality and quantity of capital

The first action mentioned in the Turner's Review is to ensure banks have enough capital to against risk, as sufficient capital is believed helpful in terms of both lowering default probability and lessening the disturbance from the exacerbation of banking system and macroeconomic. However, before the financial crisis, some academics argued that capital adequacy is not always advantageous. For instance, Blum (1999) reports the possibility of adverse effect of capital adequacy in his dynamic framework. Specifically, the lowered profit may actually reduce the default avoiding incentive (Blum, 1999). And Milne and Whalley (2001) suggest there is no long-run impact of capital requirement on bank risk-taking behaviour. These findings are against the expectation of the action in the Turner's Review but cannot used to negate the correctness of this action. Since academics solely consider the effect of capital itself and without any concern about financial crisis setting, Turner's Review, contrarily, aims to prevent future shocks and many actions will be implemented together to handle the tough situation, the combination of actions are able to conquer the adverse effect of capital adequacy.

However, when the regulator begins to draft the details, some public opinions beyond the Turner's Review are worth to rethink. First, Financial Times (2008) mentioned that the past high percentage of Non-Core Tier 1 capital is mainly driven by the tax advantage of hybrid capital in the UK. Regulators should not only care the minimum proportion of Tier 1 and Core Tier 1 capital, but also pay attention to the incentive behind hybrid capital preference behaviour, and attempt to lower that incentive, and hence make banks more voluntarily to maintain Core Tier 1 capital as much as possible. Moreover, Goodhart and Persaud (2008) propose that linkage can be built between the capital adequacy requirement and the increase of mortgage and house price. Although, the suggestion needs coordination cross-sections, it is worth to be considered as an solution that based on the original cause of this financial crisis and also have potential benefit in terms of counter-procyclicality.

The comparatively large capital reserves can directly enhance the solvency of banks. If the new rule applies, banks tend to be less reliant on counterparty payments compared with pre-crisis. In the future, even several counterparties default, banks are expected to be able to maintain their promised payments to creditors. Thus, this action could greatly strengths the banking system's anti-risk capability. Although as the Turner's Review mentioned, rising capital is at the expense of short-run bank profits, in contrast with the huge losses arise from financial crises, it is obviously beneficial.

Increase the trading book capital requirements

Besides the overall tightened capital requirements, The Turner's Review also advocates raising the trading book capital requirements and suggests the quantity requirements should be over three times than the current level. The viability of the action is proved by the subsequently proposed European Union directive. Despite it solely plans to approximately double the current trading book capital requirements and so does Basel Committee on Banking Supervision (Jenkins and Masters, 2009). As a main cause for the crisis, the exposure to the trading book can be mitigated by the cushion provided by increasing capital against trading book; the increased capital is also expected to constrain arbitrage between the trading book and the banking book (Masters, 2009).

The Turner's Review also intends to charge more in packing and repackaging activities, i.e. securitisations and resecuritisations. Securitisation (and resecuritisation) is beneficial from the angle of its contribution to the financial industry development from the end of twentieth century until the beginning of twenty-first century, but the complex nature of its products determines that it is a two-edge sword: on one hand, it is expected to diversify the investors' (including banks) portfolios; on the other hand, it makes the risk more implicit and hence creates barriers to investors' portfolio selection. More charges will raise the costs of banks to package and repackage. Being forced to take cost into consideration, banks will be more prudent before making packaging decisions. Thus, this kind of risk-taking behaviours hopefully will be reduced, so does the systemic risk.

Furthermore, the Review appeal to review the problematic VAR approach which is widely used to assess risk but vulnerably leads to the understatement of risk. Either to address the issue or to introduce a better approach to banks, individual banks are expected to have more objective understanding of their underlying risk and will be more active to lower it. Thus, the risk for whole banking system could be better-controlled and the system will be stabilised.

Avoid procyclicality and create counter-cyclical capital buffers

Not only containing the absolute amount requirement, the Turner's Review also includes the concern on the significant impact of capital variation. Under the pre-crisis regime, capital requirements tend to be procyclical. Banks are required to reserve capital during the recession and protect themselves by stopping risky lending, which not only worsens the current crisis but also leaves sequelae for the banking system for following years (Tait et al., 2009), as the liquidity of the market and the capital requirement of real economy cannot be guaranteed. Thus, in the Review, Two advises are proposed to against procyclicality. One is to use "through the cycle" as the preferred approach when estimating risk rather than traditional "point in time" which is more likely to result in serious procyclicality. Admittedly, "point in time" is more popular since it is easier for calculation and Basel II gives banks the freedom to choose methodology, the majority of banks, therefore, employ it to estimate risk before the financial crisis (Bikker and Metzemakers, 2007). However, to achieve less biased risk estimation, this situation should be reversed. A better risk model will facilitate banks' asset pricing more fairly, more appropriate valuation of loans, for instance.

Once the action is carried out, a bank is able to monitor its insider risk and making its balance sheet more objectively. Unlike pre-crisis period, banks would like to keep more capital in good time than before since with the help of more accurate risk estimation, relatively higher risk in good time is expected to be detected. Thus, to some extent, the procyclical trend in whole banking system could be reduced.

A single tree makes no forest. It is impossible to overcome procyclicality by single action, without further concern beyond the methodology issue. Another action referred in Turner's Review, to build counter-cyclical capital buffers, is also necessary. Although banks did keep capital buffers pre-crisis, it was not well regulated. Especially, small banks with risky portfolio usually had limited capital buffers (Bikker and Metzemakers, 2007). More importantly, pre-crisis capital buffers have significantly negative link to the economic position, i.e. a strong procyclical tendency (Ayuso et al., 2004). As discussed previously, banks' unwillingness to offer loans is dangerous as the real economy's capital needs cannot be satisfied in time. The problem is not only identified by Turner, but also draws Ben Bernanke' attention (the chairman of Federal Reserve) (Larosière, 2009), showing that the issue is important to tackle.

A sound counter-cyclical capital buffer rule, together with the prior discussed methodology adjustment, could do a favour for the banking system to mitigate the adverse impact from the gloomy economy, i.e. keep stable in the bad state, and conversely relax the liquidity stress for the real economy. Since from the long-run perspective, both actions help improve the self-protecting ability of banks and boost the bank lending incentive in the recession time, hence banks will be a more competent fund supplier, both the stability and effectiveness of banking system (as to provide lending is one of the major functions of banking system) and the real economy needs, therefore, could be better guaranteed to a large extent.

Well, the fundamental question that how to define capital buffer, managerial judgment or formula based calculation, as Turner said in the Review, needs further debate.

Introduce the leverage ratio as backstop

Through the interview of Julie Dickson (superintendent of financial institutions for Canada about regulation), it is clear to see the view changes over the financial crisis: from exclusive to supportive attitude on the setting of leverage ratio (Financial Times, 2009). It is expected to be an effective tool to restrict banks' risk-taking behaviour by depressing the incentive to understate their risk since the larger they invest, the higher risk they have to bear themselves (Blum, 2008). Though high leverage funds banks, its harm outweighs the potential benefit to liquidity from available funds. Therefore, when a maximum leverage ratio backstop is employed, banks will begin to be more cautious to avoid unnecessary liability. A bank's default probability which used to arise from the high proportion of liability in their books will be greatly reduced. So does the whole banking system, i.e. the stability of the banking system is expected to be enhanced.

However, to achieve the expected international agreement is a tough task. Different accounting rules, for instance, could result in dissention. The answer to that issue is that the Basel committee plans to set a consistent ratio without adjustment for differences in accounting rules (Masters and Jenkins, 2009). Whether the self-interest losers reconcile to accept the arrangement, the world will wait and see.

Accounting reform

In line with the counter-cyclical capital requirement, the Turner's Review also suggests some changes need to make in accounting rules. Especially, adding an item to denote the anticipant future losses and revising the fair value/ mark-to- market rule as it could lead to procyclicality (FSA, 2009). Although the actions are feasible since both Mr Trichet (European Central Bank president) and ISAB (International Accounting Standard Board) would like put them into the proposal (Sanderson and Masters, 2010), some, both academics and practitioners, defend for the fair value accounting. For instance, Veron (2008) argues that procyclicality of fair value accounting does not harm investor relations and limiting the scope of fair value accounting does not help as many assets have already been outside the scope, and he further points that international consistency in accounting basis is the most important factor to keep stability. McDonald (2009) also believe fair value accounting contribute to transparency which should not be set aside because its objective reflection may lead panic to the market.

In terms of giving buffers a place in the published accounts, it is reasonable. As prior discussion, counter-cyclical buffers provide cushions to protect banks from the falls due to the increasing default probability. They deserve to keep a place, while investors also deserve to know the information related to capital buffers. More importantly, presenting "Economic Cycle Reserve" (FSA, 2009) on a formal and regular accounting report facilitates supervision as well.

Changing accounting rules is a beneficial complement to the capital requirements. They work for the same objective that is to maintain stability of banking system. As the step planed in the Turner's Review, it requires international cooperation to keep accounting consistency and it needs to take time. Additionally, the defenders' opinions should be considered, to maintain the accounting transparency simultaneously is another tough task.

Liquidity issue


Rethink the failure of banks in 2007 and 2008, Northern Rock, for example. Perhaps the liquidity issue contributes more than other factors. As Shin (2009) analysed, these banks are too reliant on short-term wholesale funding. Take the widely used conduits and SIVs for instance, both of them are off-balance sheet vehicles and based on intuition to make money by borrowing short-term debt and then investing in long-term assets. The strategy lets banks be exposed to the interest rate and liquidity risk, due to the mismatching durations. Although the instruments do not show on the balance sheet, the exposure cannot be avoided (Brunnermeier, 2009). The past failures also demonstrate there are holes in the liquidity risk management.

The Turner's Review puts forward several key points for the improvement of supervision, including requiring information disclosure, creating liquid assets buffer and conducting stress test by FSA rather than by banks internally. Also, the Review proposes to define a "core funding ratio" that can be used to be a backstop or a bank's financial situation indicator. These considerations not only strengthen the important position of the liquidity risk management, but radically help enhance the banking system's ability to protect from systemic illiquidity. Actually, higher requirement for liquidity is also facilitate to increase the quality of capital. The tight liquidity regulation benefits banks' continuous operation, since liquidity is nd thus contributes to both the stability and effectiveness of banking system.

Noteworthy, Cintioli (2010) points out one drawback of liquidity-related regulation, that is, regulators often forgot to ask for illiquid data to calibrate the liquidity information. Authorities should think it over.

Balance liquidity and stability-Example: short selling ban

FSA introduced a short selling ban on September 19, 2008 (Larsen, 2008) and ended on Jan 16, 2009 with the continuous requirement for position disclosure (Hughes, et al. 2009). As the Turner' Review suggests, it is a way to balance the liquidity benefits and stability in tough times. This point has been accepted globally, many countries have temporarily banned short selling. However, this action suffers criticism. Mackintosh et al. (2009) argues that both European banks and the US banks fell after FSA lifting of the first ban although Turner himself did not think that it should be attributed to the immediate growth of shorting. In other words, the ban may be temporarily helpful, but disinhibition could cause problem. Meanwhile, hedge funds argue that short selling does not lead to bank collapses through so-called discouraging the market confidence, while risky lending is indeed the criminal to damage banks (Mackintosh et al., 2009).

Obviously, short selling has merit: it contributes to market liquidity, transaction costs reduction and pricing efficiency enhancement (Skypala, 2009). Thus, whether or not to employ short selling ban to be an emergency handling mechanism needs further discussion. This has been noticed by Turner as he leaves it in the open questions.

That is, from short-term perspective, short selling ban benefits in terms of restraining the pessimism and protecting the comparative stability of banking system in the recession, although it may against long-term liquidity need.

Institutional and geographic coverage

The pre-crisis coverage gap of regulation leaves space for some financial firms to exploit advantage. One group is non-bank financial enterprises. Although they do bank-like activities, they are actually given more freedom and not subject to rules and penalty, shifting from activities with capital requirements to off-balance-sheet vehicles (Wolf, 2008), for example. Another group of regulator escapers is the financial institutions that locate offshore. They usually take advantage of the ambiguous legal region. Since all the entities within banking system are not isolated, both group can be the trouble makers, once they are between the beetle and the block, real banks or financial institutions in other areas suffer, i.e. contagion in the whole banking system. The connection has been realised since regulators began to reflect their past mistake.

Therefore, the action that reformed regulation coverage depends on economic substance no legal form in the Turner's Review is highly important. Meanwhile, the Review emphasizes the information disclosure of unregulated financial institutions, hedge fund, for instance, to regulators. Furthermore, it also addresses the issue of geographic coverage and desires to settle off-shore centres down through legal demarcation by international agreement. These actions together can enhance the efficiency and effectiveness of supervision as they clear up the traditional regulatory blind spots. More power to restrict and access facilitate overseers to smell out the problem in advance rather than rely on hindsight to maintain the stability of banking system. Clearly, banking system will be protected by broadening regulation coverage, as these actions work like pills that are able to cure indisposition before it becomes infectious disease. In other words, they guard banking system stability by greatly reducing the systemic risks.

Deposit insurance and bank resolution

Deposit insurance

The implemented deposit insurance reform in the UK is mentioned in the Turner's Review. Apparently, the rising deposit insurance can greatly comfort depositors, since they will feel more secured and build confidence again to the banking system. Thus, the systemic stability will be enhanced by the guarantee of savings. As savings are maintained, lending service will have relatively steady funding sources to continue. The effectiveness of banking system, therefore, is also protected.

The Turner' Review also talks about the consideration of consulting temporary large balance issues (FSA, 2009). Financial Times (2009) attempts to interpret the reason: the government wants to release the tension from large savers but unsecured creditors followed by policy changing post-crisis. In the phase of crisis, the caution is creditable. It mitigates the resistance to the regulation, and focuses on comforting the "suppliers" of banking system which benefits the system back to normal operation.

However, Financial Times (2007) provides an alternative to protect savers rather than increase deposit insurance, as the author considers that 100% deposit insurance probably leads to managerial discretion in banks. The essence of the alternative in the article is to take advantage of central bank's LOLR (lender of Last Resort) role: LOLR could take over the bank which cannot afford its repayments, and then open auction the bank to put it back to private sector and get the money back to government. It sounds quite sensible and feasible, and it supports the benefit of the existence of upper limit for deposit insurance presented in the Turner's Review. Thus, it is a valuable advice to hear.

Banks resolution

The empirical study conducted by Hoggarth et al. (2001) reports that the bank crises could lead to up to 15%-20% losses of annual GDP, including both the direst resolution costs and other indirect costs to real economy. From the striking figures, anyone can tell the huge impact of the failure of large banks and its ability to shock the stability of the whole banking system. This reminds the regulators the necessity of a scientific bankruptcy process. Fortunately, as the Turner' Review refers, authorities have already redefined bank resolution regime. The action could minimise the negative effect of a fallen large bank and reduce the amplitude of banking system.

In addition, although the Turner's Review fails to mention, the global coordination is also required to do the utmost to lower global losses. The large and multinational banks, collapsed Lehman Brothers, for instance, could affect the stability of the global banking system. Inconsistent resolution regime may become potential suspect to the systemic uncertainty, thus one country's legal power is not enough to control the whole chain (Financial Times, 2009).

Credit rating agencies (CRAs)

The proposed actions related to CRAs give expression to the voice of investors. As Turnbull et al. (2008) point out, the credit rating is subject to criticism as it lacks of transparency. Some implicit commitments and unreported illiquidity make investors in the dark. Moreover, the complicated design of instruments spring from securitisation and resecuritisation makes great difficulty to rating agencies to apply proper methodology to rate and it results in inaccurate rating (Turnbull et al., 2008 and Hosp, 2009). Thus, the past credit rating regime really need to be improved. Furthermore, Hunt (2008) argues that credit rating agencies will not lose reputation on rating novel financial instruments. This finding breaks the natural restriction for CRAs due to the trade-off between building reputation and getting paid documented by Turnbull et al. (2008). Therefore, regulators should pay extreme attention to the rating process of financial innovative products. Fortunately, both the investor communication issue and rating methodology issue have been addressed by the Turner's Review.

Amato and Furfine (2004) report that the credit rating is procyclical for investment grade firms. Turner has already been aware of this trend and he believes that through investor wariness and higher capital requirements and the rationality of independent institutions (FSA, 2009), the problem can be offset.

SEC tightens the control over rating agencies as well (Chung and Duyn, 2009), which also support the correctness of Turner's point.

In the detailed plan to reform credit rating, Turner highlights the importance of consistent rating. This is one lesson learning from the crisis, sudden degrading has frustrated investor's confidence. Thus, Turner suggests the scope of applications should be narrowed to the securities that have certain ability to maintain its rating.

The Review also addresses the structured finance ratings. It reminds regulators that it is not only a methodology issue (mentioned above), but also banks may have incentives to let security design cater for a good rating.

These actions could mitigate the ambiguity of implicit rating process, and provide more trustworthy risk indicator for the market. At the same time, they benefit in terms of building a benign investor relationship. As ratings become more fair, the risk of banking system is expected to be better monitored in the public, and hence the stability and effectiveness of banking system could be enhanced.

However, one drawback of the Turner's Review is that he fails to propose some actions need to be taken for enhancing the competition among rating agencies which has been talked in Mary Schapiro's speech (Financial Times, 2009). The competition could help urge CRAs to improve the quality of rating service. The UK authorities should come up some measures to encourage competition.


Remuneration plan is commonly designed to spur manager's risk-taking willingness in order to achieve better firm performance. However, one of the lessons from this crisis is that risk-taking is not always beneficial. Especially, the top-executives working for banks, their excessive risk tolerance can bring potential instability to the banking system. In addition, Sinclair et al. (2008) point out that using short-term associated performance as the determinant of bonus for financial sector is especially problematic, as it leads to higher potential risk exposure for the long term. Thus, it is sensible that the Turner Review put forward some principles will be set to relate the banker's pay to risk control.

Also, Turner advocates generating a global agreement on banker's remuneration. It is reasonable plan, but there is some practical difficulty cannot be neglected. As one of important contributors recognised to the financial crisis, G20 summit has already addressed the issue (Betts and Hille, 2009). However, due to the different options among countries, for instance, taxation plan, the expected international agreement needs more time for consultations. In other words, policymakers should be patient and keep attempting to foster cooperation since it is a long-run task.

Noteworthy, one interesting point made by Persaud (2008) is to take advantage of remuneration policy to encourage supervisors to maintain stability of banking system. This is a good example of thinking out of box. The suggestion demonstrates fully understanding towards the essence of remuneration policy. On the contrary, the Turner's Review only concern about the problem in prior banker's remuneration plan, but fails to rethink the benefits could brought by applying the incentive-based remuneration to different groups.

In terms of the expected results from the remuneration reform, it will eventually lowers the banking risks through reducing the top-executives' risk-taking incentive. In other words, it makes stability of banking system achievable from the well risk-controlled inner management. Hopefully, Persaud's advice could be taken into consideration.

Derivative market infrastructure-example: CDS

According to Hull (2008), compared with exchange trading, OTC market does carry some credit risks as the contract may not be honoured. However, the highly increased trading volume on OTC derivatives raises the market exposure. Since OTC market, essentially, is banks. That is, the stability of banking system suffers. To protect against the potential losses from counterparties' defaults, learning from the organised exchange market that trades standardised derivatives is a good idea. On the exchange, clearinghouse as the central counterparty, together with its accompanied margin account requirement virtually eliminates the credit risk. That is why the action to develop clearing and central counterparty systems proposed in the Turner's Review is feasible and effective.

In the Review, Turner shows extreme concern on CDS. It is an instrument like buying insurance: the party that wants to prevent the loss from default is charged for the "insurance" and if default happens, its counterparty (mainly banks) pays. Obviously banks bear credit risk if the counterparty escapes from the promised payments for the protection. So it is worth to build a central counterparty to monitor the daily transaction. Actually, now, the clearing plan for CDS which is carried out in Europe. LCH. Clearnet SA (the biggest clearing house in Europe) has already announced that it will begin clearing CDS in Mach (Serdarevic, 2010).

Besides system enhancement, Turner also advocates the new system could be only adopted for standardised CDS contracts, while OTC fashion should be kept due to some contracts are tailored design (FSA, 2009).

The action will reduce the banks' credit risk arise from CDS trading, and hence contributes to lower the systemic risk. The less risk exposure, the more stabile the banking system will be.

Turner's further concern on product regulation also employs CDS as an example. This open question will be discussed later.

Macro-prudential analysis

The bank of England and FSA should conduct regular macro-prudential analysis over the whole banking system and turn the analysis into policy responses, so does the global financial supervisory institutions, IMF, for instance (FSA, 2009). This is the radical regulatory response to this financial crisis in the Turner's Review. As both Goodhart (2009) and McMahon (2009) point out that central banks have two primary tasks: price stability and financial stability. Unfortunately, authorities used to focus on the former. It is not fully their fault, monetary policy has been identified to be the effective tool to maintain price stability, for instance, the measure by adjusting short-term interest rates has been widely applied. However, there is no consensus on a measure of general application to against financial shocks pre-crisis. More importantly, there is conflict between the two tasks and need balance. That is why the long-term financial stability is hard to achieve.

In the Turner's Review, lots of detailed regulations have been discussed before this action, like capital and liquidity requirements. Undoubtedly, this action shows the more aggregate review. It directly targets the systemic risk. Through macro-prudential analysis of all the identified indicators, as Turner exemplified that credit extension, maturity mismatching, overall leverage and margins, authorities are expected to monitor systemic risks more efficiently and hence have better control of the whole banking system. Clearer function division and closer coordination among supervisors (within one nation) to overcome prior "underlap" problem will play important role in the process.

The globalisation, especially in economy and banking system, requires international organisations to take more responsibility. Turner suggests utilising international institutions' power to improve "early warning system", "surveillance" and "peer review" (FSA, 2009). It could greatly strengthen the stability of the global banking system.

The FSA's supervisory approach

Pre-crisis, regulators believe market discipline should be put in the first place. They trust the power of market discipline, but ignore the fact the interests of government and market participants do not exactly go together and thus supervisors cannot unduly rely on market discipline (Dabasish and Das, 2009). Also, authorities seem over-confident on the bank management before the crisis. Based on the above reflection, Turner proposes that FSA tighten its supervisory rules to be a more powerful controller.

However, some parts of the strict supervision have been questioned. For instance, similar to Tuner's proposal, US supervisors also more actively involved in banks' personnel decision with strong guidelines of the skills they are looking for, while it leads to the confusion that how much power banks are exactly entitled to control the destiny by themselves (Masters and Guerrera, 2010).

Risk management and governance

The Turner's Review also calls for the improvement in risk management at the individual level. Although low individual risks do not unnecessary imply a low systemic risk so that cannot guarantee direct protection for the whole banking system, at least well managed banks can protect themselves to a large extent. Turner's concern is reasonable, since actually investment firms begin to address the risk management issue after the crisis as they realise risk management is an influential factor to determine whether the firm can survive or not (Grene, 2009).

In terms of specific actions, The Review highlights the importance of professional and independent risk management function, and the rules of main players, i.e., managers, non-executives and shareholders (FSA, 2009). The target is risk management is not to pursue the maximum profit, but to maximize profit under predefined risk toleration. This nature makes the interest alignment with other powerful parties not perfect. Thus, to entitle the corresponding department direct reporting power (to the board) is necessary. Another important issue is the lack of basic risk management knowledge and skill, especially, non-executives and shareholders. It virtually depresses their supervisory efficiency. To take advantage of their discipline in the future, skill training and requirement are useful. In addition, as discussed before the risk-taking incentive embedded in banker's remuneration is worth to refer in the agenda.

All these sensible actions will develop the individual banks' anti-risk capability. From long-run perspective, once the recommendation is universally accepted and followed, the systemic risk of banking system is expected to be reduced as a result of the joint efforts. Again, the systemic stability will be approached.

Large complex banks' regulation

The crisis has raised the issue that how to effectively manage the giants in banking system. The turn's Review clearly points out the impossibility to divide banks into two categories, namely, utility banking and investment banking. Rather than wasting time to make clear separation of banks, Turner highlights that to make restriction on banks' risky activities is more viable.

This proposed action is thoughtful and realistic but controversial. The powerful evidence for its correctness is the support from both the prime minister and chancellor as they have already shown their strong disagreement with banks separation that was proposed by the governor of the Bank of England Mr King. On the contrary, even the supporter for Mr. King has implied that banks' separation is unnecessary (Parker, et al. 2009). Not only in the UK, but also in the US, the proposal of reapplying Glass-Steagall Act which claims that "safe and predictable" and "risky" can be separated by demerging the commercial banking from the investment banking is subject to criticism: the reuse of Glass-Steagall can only offer profitable opportunities due to the merger and acquisition accompanied subsequently, while it does nothing good for controller risky activities, surplus lending and leverage, for instance (Lackritz, 2010). In other words, Turner's point is persuasive.

Once the action is fully implemented, the risky trading activities are like being put under the magnifier. In other words, it greatly facilitates intensive supervision on highly potential trouble makers. When trouble makers are well controlled, the stability of banking system can be maintained.

Cross-border banks

Global cross-border banks

Why the US subprime issue could results in global financial crisis? A very important factor is the globalisation of banking system and its products: lots of global cross-border banks. The insufficient international cooperation was unable to preventing the situation from deteriorating at the beginning of large banks' collapses. That is the intuition behind addressing this issue. The Turner's Review highlights the significance of increasing international coordination, especially the information sharing. And he urges to build the coordination mechanism which is expected to bring great benefit in terms of filling up pre-crisis supervisory gaps by clarifying power and responsibility of different parties. More importantly, with the help of the international legal framework, the home and host countries' interests will be better aligned. The defensive line for maintaining global banking stability, therefore, will be consolidated.

European cross-border banks

Due to the integration, European has own established regime. That is why Turner separately talks about European cross-border banks from global cross-border banks. The balance between national power and European power is the central issue accounted in the Review. Turner proposes to align different tasks for the national level and the European level supervisions but does not states clearly the preferred option between who should be honoured more power. According to Atkins (2009), ECB (European Central Bank) made a clear stand that the crisis provide the opportunity for EU's banking supervision to converge and it would like to entitled power to achieve that aim.

Product regulation

Products on retail markets

In terms of retail market, Turner questions whether mortgage should be subject to regulation or not and he lists the arguments for and against mortgage regulation through exerting minimum LTV or LTI requirements. Obviously, there has to be some changes on retail market, since the default of subprime mortgage induces this crisis. It is necessary to ensure the borrower's affordability that has mutual influence with bank lending capacity. As Figure 1 (HousePrices. uk. net, 2010) below shows, different indexes all show that the UK house price is still very high, the threat on the banking system stability from future affordability remains. Thus, no matter the final action is, Turner's concern should turn to regulatory response. The action will prevent banking system from suffering credit crunch again.

Figure 1 2000-2009 UK House Prices from different indices UK House Prices Graph

Figure 1 illustrates the UK house prices from the Halifax and Nationwide monthly house price indices, CLG/LR mix-adjusted index, Financial Times HPI-MA, new Land Registry HPI, and the Rightmove asking price index from 2000 to 2009. (HousePrices. Uk. net, 2010)

Products on wholesale markets

Besides products on the mortgage market, the diverse financial products on wholesale market are also doubted about their safety. Turner exemplifies the controversy on the necessity of wholesale product regulation by CDS market. Whether the sophistication brings more stability or more risk, it seems the party supports restriction more persuasive as there is no evidence showing that the so-called risk diversification performs well before and during the crisis. Surely, Turner's prudence is creditable, he suggests taking take to weigh and balance. As he knows that undue intervention may inhibit the motivation for future financial innovation which does play essential role in the financial industry's development.

Michael (2009) makes a convincing analogy in his letter between the wholesale product and food and drugs. He argues that universal product test for other industries should be also applies to financial sector. This should be considered in the authorities' further debate.

Other counter-cyclical tools

Vary LTV or LTI

LTV and LTI are two alternatives to measure borrowers' affordability, but Turner proposes that to simply set maximum LTV or LTI may be not fully advantageous, while let the requirements vary against the economic cycle could provide more benefits since they become another counter-cyclical tool.

Marginal calls

The procyclicality of collateral marginal calls is also noticed by Turner. Thus, he intends to introduce some regulations to control procyclicality through adjusting requirements on haircuts.

III Conclusions

From detailed discussion above, all the points Turner has made in his review are valuable and the proposed actions are feasible. If all his recommendations are fully implemented, the banking system will be more stable and more effective than pre-crisis era. With the guideline of supervisory policy, the financial market will progress orderly. Indeed, as Turner hopes, further consultations are need for such an important long-term plan. Additionally, authorities should be patient to hear public voice, as a beneficial complement to their own proposal, although they do not have power to do, they do have wisdom to think.