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The financial crisis was caused by lack of supervision of the financial sector, rather than bankers breaking the rules, according to the influential Adam Smith Institute.

Director of the free-market think-tank Eamonn Butler likens recent financial troubles to the parliamentary expenses scandal – with everyone sticking to the rules, but without proper supervision of the consequences.

In a paper entitled Failure of Supervision, Butler calls for “ better supervision of the risks being run by financial institutions and the systemic risk in the sector as a whole”.

He adds that the Financial Services Authority (FSA) should be scaled back rather than expanded, with more responsibility given to the Financial Reporting Council, the Accounting Standards Board, and non-executive directors.

The response to the Turner Report also calls for the FSA to be answerable to Parliament, with proper performance indicators.

“Adding more checklists or employing more regulators would not have prevented the crisis,” says Butler.

The institute urges the Bank of England to have a formal supervisory role, with continued stress testing of the financial system.

It also calls for investment banking to be separated from retail banking, stricter capital ratios for banks and the disqualification of directors from banks that have required a government bailout. Butler argues against the proposed new international bank regulator, calling instead for better liaison between national regulators.

Adam Smith Institute (ASI) is a free-market think-tank based in London.

Influential ASI proposals have included outsourcing local government services and reducing the number of quangos.

Published in City AM here