On January 21, Lord Adair Turner, chairman of the UK Financial Services Authority (FSA), gave The Economist’s Inaugural City Lecture in London. He set out his views on the root causes of the global financial crisis and on the implications for future regulation of the financial system.  

Lord Turner said he believed the “originate and distribute” model of financing lending had a role to play in the future, but needed to be reformed, with less complexity and opacity. He also said that over the last decade the scale of proprietary trading has created risks and that financial innovation has, in many cases, delivered minimal economic value and actually increased the dangers of financial instability.  

In his lecture, Lord Turner outlined three key long-term regulatory initiatives to reduce the probability and severity of future financial crises: (i) the introduction of new capital adequacy approaches including counter-cyclical capital requirements and requiring more capital to be held against risky trading strategies; (ii) creating a new liquidity regime focused on market-wide risk as well as individual firms’ liquidity; and (iii) ensuring that financial activity is regulated according to its economic substance, not its legal form.  

These themes will be developed further in the “Turner Report” on the regulation and supervision of the banking system, which is expected to be published in March 2009.