Capital and liquidity requirements will be the levers that regulators use to prevent future failures of systemically important banks, as far as prevention is possible, Adair Turner, chairman of the Financial Services Authority, confirmed yesterday. Other responses addressing banks' size, and high levels of complexity, interconnectedness, and integration, would play a part, Turner told an FSA conference to discuss feedback to his review, but the best balance between different policy instruments to address the "too-big-to-fail" issue was still unclear, and the optimal policy was "highly likely to include a combination of different policies".
Turner pointed out that the Basel II framework actually allowed larger banks, via their ability to use the advanced internal ratings-based approach, to operate with slightly lower capital requirements than other banks. Before the crisis it had been too readily accepted that if banks had size and diversity they were safe. That approach now needed to
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