Outgoing UK Financial Services Authority (FSA) Chairman Callum McCarthy has outlined a plan for tackling the crisis besetting world financial markets.

Just a few hours after the FSA announced a four-month ban on financial equity short-selling, Mr McCarthy described the next steps required from market players and supervisors.

Speaking at the Lord Mayor’s City Banquet in London, he said banks in particular have to be more realistic in their risk management policies.

“The present troubles have exposed the fact that very many of the best-regarded financial institutions had risk management which was not up to the expectations placed upon (them),” he said.

“This is something which requires deep and urgent attention.”

Mr McCarthy says regulators also must bear some responsibility for current financial turmoil.

“Throughout the world there have been regulatory failures which have made the necessary process of reappraising and re-pricing risk more painful than it need have been,” he said.

Market supervisors, whether they are central banks or government authorities, need to reconsider the way banks hold capital, in terms of both volume and liquidity, he says. Regulators also need to be more transparent, open and thorough in their dealings with industry.

Mr McCarthy says the FSA is learning quickly, and reforms introduced since the collapse of the Northern Rock banking group last year are already having an impact.