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Lord Turner, chairman of the Financial Services Authority (FSA), yesterday insisted that the momentum for regulatory reform must be maintained, despite recent signs of economic improvement. Speaking at the Lord Mayor’s City Banquet, he said that failing to implement a more robust capital and liquidity regime for banks globally could allow a similar crisis to develop in years to come.
He told guests that the banking industry needed to restore trust in the vital role that it performs. Banks should be focusing on their core functions for the economy and society and considering whether they accept business that falls outside this. This may mean that banks will be lower return, but also lower risk, investments: “Bank investments might become more boring, but after the last year, there’s a lot to be said for boring”.
Lord Turner said that the City is a centre of huge expertise and should continue to be a major provider of wholesale financial services to Europe and the rest of the world. He also stressed that many parts of the financial system "aren't bust and don't need fixing".
He added, however: "It is possible to say that, but also recognise that not all financial innovation is valuable, not all trading activity plays a useful role, and that a bigger financial system is not necessarily a better one".
The FSA’s response to the crisis has concentrated on ensuring that banks have more capital and liquidity both through domestic requirements and international agreements. But public concern is significantly focused on the debate about bonus levels.
Commenting on this debate, Lord Turner said that: “The focus of initial regulatory attention had been on the structure of remuneration where the FSA has led the world in introducing rules that focus on reducing risk".
However, the aggregate level of bonuses also has implications for the pace at which banks can build stronger capital ratios creating a less risky system. The international Financial Stability Board will this week state in its report to the G20 leaders that it is essential that banks should prioritise using high profits to rebuild their capital base to support lending and reduce risks. Dividend payments should be consistent with this policy. Regulators will have a legitimate interest in banks' aggregate bonus rates where these have implications for their capital position.
Greater globalisation of financial markets increases the need to find international solutions. The FSA has set out an ambitious agenda for international work in the Turner Review and is fully committed to leading that debate.
Click here for the full text of the speech.
