Post by MMM on Mar 19, 2009 7:34:21 GMT 4
Derivatives Could Be Banned In Banking Overhaul
Published on 03-18-2009
Source: Telegraph
The complex financial products blamed for triggering the credit crunch could be banned as too risky under a sweeping overhaul of financial regulation published on Wednesday.
Lord Turner will also suggest a new regulatory regime where the state sets firm limits on mortgage
Lord Turner, the chairman of the Financial Services Authority, will raise the possibility of an outright ban on instruments like 'collateralised debt obligations' (CDOs) - complex packages of debts from many sources.
Some CDO packages were sold and resold repeatedly, and some were even funded using new CDOs, creating so-called CDO-squareds. Such "exotic" products were supposed to spread the risks of default among many investors.
In fact, catastrophic losses from debt bundles that included tranches of defaulting "sub-prime" mortgages sent shockwaves through the international banking system in 2007, leading some banks to collapse and the survivors to severely limit their lending.
Lord Turner's report will end with an "open issues" chapter suggesting that some sophisticated financial instruments are simply too complicated to be used without unacceptable financial risks.
It will not actively endorse such a prohibition, not least since an effective ban would require international co-operation. Instead, Lord Turner will raise it as an idea worthy of further discussion.
The report will also signal much tighter rules on mortgage lending to prevent the lax credit conditions that preceded the current crisis.
Under current regulation, there are no formal limits on the size and nature of loans secured on residential property: as long as a lender and a borrower can agree terms, a mortgage can be granted.
That freedom allowed some householders to borrow more than the value of the property they were buying and borrow many multiples of their annual salary.
Gordon Brown, the Prime Minister, has already signalled that he wants to see some limits on future mortgage lending, suggesting that 100 per cent loan-to-value deals should be prevented.
Lord Turner will also suggest a new regulatory regime where the state sets firm limits on mortgage lending.
Until now, the FSA has focussed its mortgage regulation on the way lenders sold loans, making sure that customers were fully aware of the implications of the debt they were taking on.
The Turner report will ask whether the FSA should in future get more directly involved in "product regulation" by saying that certain types of mortgage are "by definition wrong" regardless of the status and income of the borrower.
Lord Turner last month told MPs he could see a "strong argument" for his authority directly regulating mortgage products and imposing limits on households' borrowing.
Signalling a preference for limits based on salary multiples, he has also said that a customer's loan-to-salary ratio is the best measure of how sustainable a mortgage would be.
The FSA estimates that as many as 7 per cent of all UK mortgages - around 820,000 - are "sub-prime" and at high risk of default.
His report will also raise question marks about many "self-certified" mortgages granted solely on the basis of information supplied by the customer.
A separate report from the FSA will outline its latest plans for overhauling the bonus culture of City banks and other financial institutions.
In a draft code of practice on bank remuneration policies last month, the FSA suggested that City bonuses that dramatically outstrip base salaries should be abandoned and replaced with reward schemes that pay employees based on their performance over several years.
Published on 03-18-2009
Source: Telegraph
The complex financial products blamed for triggering the credit crunch could be banned as too risky under a sweeping overhaul of financial regulation published on Wednesday.
Lord Turner will also suggest a new regulatory regime where the state sets firm limits on mortgage
Lord Turner, the chairman of the Financial Services Authority, will raise the possibility of an outright ban on instruments like 'collateralised debt obligations' (CDOs) - complex packages of debts from many sources.
Some CDO packages were sold and resold repeatedly, and some were even funded using new CDOs, creating so-called CDO-squareds. Such "exotic" products were supposed to spread the risks of default among many investors.
In fact, catastrophic losses from debt bundles that included tranches of defaulting "sub-prime" mortgages sent shockwaves through the international banking system in 2007, leading some banks to collapse and the survivors to severely limit their lending.
Lord Turner's report will end with an "open issues" chapter suggesting that some sophisticated financial instruments are simply too complicated to be used without unacceptable financial risks.
It will not actively endorse such a prohibition, not least since an effective ban would require international co-operation. Instead, Lord Turner will raise it as an idea worthy of further discussion.
The report will also signal much tighter rules on mortgage lending to prevent the lax credit conditions that preceded the current crisis.
Under current regulation, there are no formal limits on the size and nature of loans secured on residential property: as long as a lender and a borrower can agree terms, a mortgage can be granted.
That freedom allowed some householders to borrow more than the value of the property they were buying and borrow many multiples of their annual salary.
Gordon Brown, the Prime Minister, has already signalled that he wants to see some limits on future mortgage lending, suggesting that 100 per cent loan-to-value deals should be prevented.
Lord Turner will also suggest a new regulatory regime where the state sets firm limits on mortgage lending.
Until now, the FSA has focussed its mortgage regulation on the way lenders sold loans, making sure that customers were fully aware of the implications of the debt they were taking on.
The Turner report will ask whether the FSA should in future get more directly involved in "product regulation" by saying that certain types of mortgage are "by definition wrong" regardless of the status and income of the borrower.
Lord Turner last month told MPs he could see a "strong argument" for his authority directly regulating mortgage products and imposing limits on households' borrowing.
Signalling a preference for limits based on salary multiples, he has also said that a customer's loan-to-salary ratio is the best measure of how sustainable a mortgage would be.
The FSA estimates that as many as 7 per cent of all UK mortgages - around 820,000 - are "sub-prime" and at high risk of default.
His report will also raise question marks about many "self-certified" mortgages granted solely on the basis of information supplied by the customer.
A separate report from the FSA will outline its latest plans for overhauling the bonus culture of City banks and other financial institutions.
In a draft code of practice on bank remuneration policies last month, the FSA suggested that City bonuses that dramatically outstrip base salaries should be abandoned and replaced with reward schemes that pay employees based on their performance over several years.