The UK's banking sector watchdog said minimum capital requirements for banks should be much higher than the current ones to avoid a repetition of the financial crisis which has shaken the world over the past year and a half.
A report released Wednesday, written by FSA Chairman Adair Turner and requested by UK Prime Minister Gordon Brown at the height of the financial crisis, recommends sweeping changes to the regulation of bank capital, rating agencies, hedge funds and the FSA itself.
Despite highlighting the severity of the financial crisis by saying it was the worst for at least a century, Turner said that the recession would not be as bad as the downturn between 1929 and 1933.
Regulatory minimum capital should be "significantly" increased from the current Basel 2 regime, which requires banks to have a total capital ratio of 8 percent of risk weighted assets.
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This would make banks less profitable, but would equip them to weather storms such as the credit crunch, which has in the past 18 months caused the collapse of Wall Street giants Lehman Brothers and Bear Stearns, and triggered the full or partial nationalisation of five major British lenders.
"The future world of banking probably will and should be one of lower average return on equity but significantly lower risk to shareholders as well as to depositors," the FSA said.