FSA chairman expands on themes from Turner Review

Lord Turner, chairman of the Financial Services Authority (FSA), said today that the potential macroeconomic costs of tighter regulation for banks had to be set against the benefits of lower risk to financial stability.

In a speech at the Global Financial Forum in New York, he expanded on three themes from his recent review of banking regulation.

Lord Turner said:

"A major objective must be to return banking to its basic functions – providing vital services of real value to the real economy. And a major lesson of the crisis is that that we cannot rely on market discipline alone or even primarily to achieve this, or to ensure that financial instability risks are contained, but must use robust regulation.

"The required reform is multifaceted. But three elements of reform are particularly important: a macro-prudential approach, major changes to capital adequacy regulation and major changes in the regulation of liquidity."

He told the conference that in designing a new global framework for the regulation of banking there was significant agreement, but also areas with no clear answers yet, including:

• How to balance any possible costs of higher capital and liquidity requirements against greater systemic stability;
• Whether banks that are "too big to fail" may be expected to hold extra capital; and
• The possibility of cross-border banks facing more onerous local liquidity and capital arrangements.

In conclusion, Lord Turner said:

"We need to design a banking system and credit intermediation system focused on its core and essential functions in the real economy and better able to be a shock absorber rather than itself a source of instability."