Lord Turner, chairman of the Financial Services Authority (FSA), said today that excellent supervision is a necessary but not sufficient condition for financial stability, warning that unless rules are changed radically, future crises will not be avoided.
In a speech at the annual British Bankers’ Association conference, he said that it is essential that we learn lessons and accept the need for radical change – change in the style of supervision, change in the regulations applied to banks, and changes in the banks themselves.
He argued that strong capital and liquidity are central to the reform of banking regulation going forward.
Lord Turner said:
"One clear need is to get better at identifying emerging systemic risks – and to create tools which can act against these risks at the macro level. But it is essential to recognise that however much we improve our ability to see bumps in the road ahead, that ability will remain highly imperfect. So the more fundamental change is to create a financial system with more shock absorbers: and the shock absorbers of the banking system are capital and liquidity."
Lord Turner went on to identify three interconnected issues where the FSA’s own thinking had progressed since the publication of the Turner Review or where there are a number of possible solutions for further consideration. He argued that their resolution will be key to the design of the new capital and liquidity rules needed at a national, European and global level.
- How to deal with banks which are too-big-to-fail;
- How to deal with cross-border banks;
- Narrow banks and investment banking: whether it is possible to achieve a legal separation.
In conclusion, Lord Turner said:
"The new, more intensive approach to supervision and the new regulations which we can and will impose can guard, to a significant extent, against the dangers of financial instability. But it is up to the banking industry itself to restore an appreciation of the positive role which banking can and must play and to create a culture focused on delivering necessary services to customers."
For the the full version of the speech click here.