Financial products should be regulated like medicine in future, the Bank for International Settlements, said on Monday as it advocated sweeping reforms to financial instruments, markets and institutions.

The central bankers’ bank had previously given the most accurate warnings about the impending financial crisis.

In its annual report on Monday it called for an overhaul of financial regulations, economic policy and the structure of the global economy.

It advocated big reforms to markets to limit bilateral trading between banks and instead introduce central counter parties, with trading on regulated exchanges.

It said institutions, particularly banks which posed a risk to the financial system, should also be subject to higher requirements to hold bigger buffers of capital against a future crisis. The authorities should strive to increase those buffers in good times.

It also recommended “a scheme analogous to the hierarchy controlling the availability of pharmaceuticals”, with a sliding scale topped by the safest products available for everyone to purchase, and tailed by financial instruments deemed illegal.

Although the BIS was clear that these reform suggestions were for the future, it said it was vital that thought be given to the ongoing structure of the financial system while the patient was still on life support. Efforts so far, it concluded, had been a “messy mixture of urgent treatment designed to stem the decline, combined with an emerging agenda for comprehensive reform to set the foundations for sustainable growth”.

It highlighted two main risks: first, that not enough will be done to ensure a durable recovery from crisis; and second, that the emergency action to stabilise the financial system will undermine efforts to build a safer system.

The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.

This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.

Outside the financial system, the BIS warned that economic management also needed to change. The huge increases in public deficits were “at serious risk of overshooting even in the economies with the most room for debt expansion” and would be difficult to restrain.

The authors of the report also had little confidence in central bankers’ ability to raise interest rates quickly enough when recovery comes. “Because their current expansionary actions were prompted by a nearly catastrophic crisis, central bankers’ fears of reversing too quickly …increase the risk that they will tighten too late,” they said.

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