Turner: Regulators must be flexible in future

Chairman of the Financial Services Authority Lord Adair Turner told guests at last night’s Mansion House: “We need to build a sounder banking system for the future and many of the reforms needed to achieve that are already in hand.

“But we also need to ensure that the stability we build is not the stability of the graveyard.

“The new structures which will be fully in place by next spring – and in particular the role of the FPC – are well designed but we will need to use them well – and to be open to further policy innovations – if we are to overcome the deflationary headwinds we face.”

Turner said this flexibility was part of the reason the Financial Services Authority had decided not to impose further capital requirements on lenders using the Funding for Lending scheme.

He said greater economic resilience required “further progress towards the adequate capital ratios we didn’t have in place before the crisis”.

But he acknowledged: “But if we simply demand higher capital ratios, and if banks achieve them via deleveraging, that would be bad for credit supply and bad for economic growth.

“So we face at least a potential short-term trade off between resilience and lending.

“At the FSA we have made adjustments to our capital regime to allow additional FLS lending to be supported by capital buffers already in place – with no additional incremental capital requirement – action which will help remove a potential impediment to use of the scheme.”

Turner said the crisis was “not a bolt from the blue – it arose from poor supervision, from bad rules and structures, from dangerous cultures – and the errors were made by regulators, economists, central bankers and public policy makers, as well as bankers themselves”.

He said a lot of “apparently very clever people got it very wrong and the ordinary citizen suffered”.

And he said regulators must do better in future.

Turner admitted the FSA’s mistakes in supervision of the banks but he also blamed poor rules.

“It’s important to place FSA supervisory failures in context, because if we tried to fix the problems of the past simply by supervising more intensely and better, we would fail to ensure a more stable system,” he said.

“Because still more important than poor supervisory approach were deficient rules, deficient structure, and dangerous culture.”

Tuner also said joining the FSA in September 2008 “felt like being appointed captain of the Titanic after we’d hit the iceberg but before we’d actually sunk”.