On September 22, Lord Turner, the Chairman of the UK Financial Services Authority (FSA), gave a speech in which he emphasized that the momentum for regulatory reform needs to be maintained and restated his belief that if a more robust global capital and liquidity regime for banks is not implemented now, a similar crisis to that of 2008-9 may occur in the future.
Lord Turner described the current financial crisis as having been “cooked up in trading rooms where not just a few but many people earned annual bonuses equal to a lifetime’s earnings of some of those now suffering the consequences.” He went on to describe it as “the worst crisis for 70 years” and said that a worse outcome was “only averted by quite exceptional policy measures.”
Lord Turner said that he maintained his belief that the City of London should continue to be a major provider of wholesale financial services to the rest of the world. However, he also reiterated that some financial innovation is not valuable, some trading activity is not useful, and a larger financial system is not necessarily a better one. The financial industry has an ability to “generate unnecessary demand” for its services, as “more trading and more financial innovation can under some circumstances create harmful volatility against which customers have to hedge, creating more demand for trading liquidity and innovative products.”
Lord Turner stated that the banking industry needed to restore trust in the vital role that it performs. Banks should be refocusing on their core social and economic functions of providing savings, credit and payment products to customers, instead of focusing on over-complex products that are “of no real use to humanity.” 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.”
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 recently, public concern has been more focused on the debate surrounding bonus levels. When commenting on this, Lord Turner said that the FSA has led the world in introducing rules that focus on reducing risk.
He concluding by advising that the Financial Stability Board’s forthcoming report to the G20 will state that it is essential that banks prioritize using profits to rebuild their capital base, support lending and reduce risks rather than to pay high bonuses. Lord Turner believes that regulators have a legitimate interest in banks’ aggregate bonus payments where these have implications for their financial resources position.
Click here to read the full speech.