By Kimberlee Kruesi

WASHINGTON (MNI) - Global financial markets should strive to find a optimal level of capital requirement for banks that would reduce risk, UK financial industry regulator Adair Turner said Thursday.

Higher capital requirements, besides lowering risk, would help establish a stable global economy, said Turner, chairman of the U.K. financial regulation agency the Financial Services Authority. The FSA sponsored the lecture.

Capital requirements have not been strictly enforced in the past, he said, because of the belief that markets would provide the discipline to protect the institutions, depriving excessive risk of capital.

However, the financial crisis of last fall exposed weaknesses in the theory that "financial markets will run efficiently, rationally and self regulate." The true amount of risk, it turns out, is not necessarily reflected in the terms of transactions.

While Turner conceded the global economy needed higher capital requirements, he did not specify what amount of capital optimal for lowering risk.

Instead, global financial leaders need a international organization to implement higher capital requirements and other risk reducing regulation, Turner said.

For example, Turner suggested the G-20 should sign treaties enforcing law and not simply agree on ideas.

With FSA enforcement, the U.K. banking system is now more resilient to risk with higher capital requirements, Turner said. More countries should follow the FSA example, he encouraged.

"U.K. banks are now capitalized at a level which will enable them to absorb severe stresses, and the short-term priority is to maintain bank lending to the real economy" Turner said.

** Market News International Washington Bureau: 202-371-2121 **