Financial regulations must be overhauled to ensure banks and other institutions can cope more effectively with financil risk, the chairman of the Financial Services Authority, the UK national regulator, has argued.

The "originate and distribute" model of financing lending had a role to play but should be less complicated and opaque and argued that over the last decade the scale of proprietary trading created risks and that financial innovation had often delivered minimal economic value while making the financial system more unstable, Adair Turner, who is a member of the House of Lords in the UK parliament, said in a lecture.

The FSA has come under fire in the UK from commentators and politicians for failing to foresee the severity of the credit crunch and for not warning banks and other institutions about risks posed by complex and often hard-to-value derivatives. The FSA was created in 1997 by the incoming Labour government, removing some financial oversight functions from the Bank of England.

Lord Turner argued for long-term regulatory initiatives to reduce the likelihood and severity of financial crises, such as a new approach to capital adequacy with more capital held against risky trading strategies and counter-cyclical capital requirements.

The Basel system of banking regulations, which stipulate how much capital financial institutions must set aside to cover risk, has been criticised for making economic cycles more severe because banks can be forced to sell assets to shore up their capital, therby accelerating market sales. Lord Turner said the rules should be enforced to ensure they had a "counter-cyclical" effect on banking, rather than make cycles more severe.

A new regime should focus not just on individual firms' liquidity but also on market-wide risk and regulate financial activity according to its economic substance, not its legal form, Lord Turner said.

Lord Turner promised more details in his report, which will set out the changes the FSA has already made, those where there are proposals in principle but need consultation, and those where it has defined objectives but needs international agreement.