Regulatory crackdown 'must not go too far'

Responsible private banking practices will not be brought about by the draconian separation of high street bank and investment bank operations, the Investment Management Association (IMA) has said.

In a new report, the organisation indicated that a policy move such as the Glass-Steagall act, introduced in the US in the 1930s to control speculation, would be counterproductive.

The question of how best to stop the activities of investment banks from doing harm to the real economy in times of financial crisis has assumed new importance with the onset of the credit crunch.

Banks including RBS and Northern Rock have been forced into accepting government bailout funds due to losses caused by risky investments.

Two firms have even been nationalised entirely as a result of the crisis.

Richard Saunders, IMA chief executive, said: ’Regulation and competition must … deal with the risk of losses from investment banking activities undermining other activities which are the essential lifeblood of a market economy.

’We do not advocate mandatory separation as in the old US Glass-Steagall legislation, but instead smarter use of capital rules to achieve this.’

He added: ’It is not a question of more or less regulation but of more effective regulation.’

The IMA’s comments come as part of its response to the Turner review, which is a collection of recommended changes to the UK financial regulatory framework made by the head of the Financial Services Authority in March.ADNFCR-2318-ID-19227466-ADNFCR