Adair Turner, Chairman, FSA, gave a speech at the Mansion House City Banquet on 22 September 2009.

The theme of Lord Turner’s speech was that following the worst financial crisis for 70 years, and the narrow avoidance of what could have become the new Great Depression, not only is radical change needed in regulatory and supervisory frameworks, but there also needs to be a change in the philosophy of regulation.

The change in philosophy will need to be accompanied by a change in the FSA’s mindset. Prior to the financial crisis, the FSA and other securities and prudential regulators had automatically assumed that any financial innovation was beneficial, and that more trading and more creation of liquidity was always useful. The effect of this widely shared mindset was the setting of too low capital requirements.

So the mindset will change in three particular areas:

  • With the new International Financial Stability Board taking the lead, regulators world-wide will be requiring an elevated level of prudence from the banks in the form of larger shock-absorbing buffers of capital and liquidity.
  • Much higher capital requirements will be imposed against the more risky and complex trading activities, especially when their benefits to the economy are unclear.
  • Regulation will become more assertive, with less trust being placed in market discipline.

In short, regulators will have to dispense with the idea of perfect, self-equilibrating markets and rational human behaviour. And on the other side of the fence, as it were, bankers will have to change their behaviour as well, in order to regain public trust, by demonstrating that what they do is not only socially useful, but provides vital public functions which include linking savers to investments and allocating capital to efficient use.

Banks will have to concentrate more on their core functions, and although there will still be a need for activities the social usefulness of which will not be immediately apparent to the public and which will have the capacity to generate large rewards for indvidual traders, the banks will have to start thinking very carefully as to which of these activities actually do deliver, say, useful hedging value and which are in reality no more than speculative and risky exposures.

Lord Turner then moved on to bonuses, a key factor in the public’s trust of banks. He said that the role of bonuses in the development of the financial crisis should not be over-stated, and emphasised that the regulator’s role would be more likely to affect remuneration structures rather than remuneration levels.

View Mansion House Speech, 22 September 2009