The FSA has published a speech that Lord Tuner (Chairman, FSA) gave at the fourteenth Chintaman Deshmukh memorial lecture at the Reserve Bank of India in Mumbai. The speech is entitled After the crisis: assessing the costs and benefits of financial liberalisation.
The general message in Lord Tuner’s speech is that policy makers and regulators have to be prepared to challenge previous assumptions about the unlimited expansion and liberalisation of the global financial services sector.
According to Lord Turner there is now growing agreement about the regulatory change needed to create a more stable financial system, such as higher bank capital and liquidity and more capital against trading books. However, these responses do not address more fundamental questions such as the macro-economic impact of volatility in the supply and demand for credit.
Lord Turner argues that policy makers should be open to policy options that have been excluded by the free market consensus of recent times:
- Developed countries should consider macro-prudential tools to control credit expansion, particularly in an upswing. This could be done by countercyclical variations in banks’ capital or liquidity requirements, that may need to be applied at a sector specific level.
- Policy instruments such as taxes which place constraints on short term speculative inflows may be particularly relevant for some emerging economies.
- A variety of levers focused on ‘putting sand in the wheels’ of short term speculative trading should be considered. Whilst increasing capital against bank trading activities is critical transaction taxes should not be excluded, despite the practical difficulties of implementing them.