FSA Turner’s speech: Responding to the financial crisis. Challenging past assumptions on capital levels
01 December 2009
Lord Turner said that on capital requirements there is strong consensus that the global banking system should run with more capital and lower leverage in the future than in the past. The key question is how much more capital banks will have to keep.
Concerning capital requirements, Lord Turner said there is very strong consensus that the global banking system should run with more capital and lower leverage in the future than in the past. However, there remain some difficult questions to be asked such as how much more? or Is the optimal capital ratio roughly 5 per cent, or roughly 10 per cent, or roughly 20 per cent? Law makers and experts are working on it.
Lord Turner set out three current challenges concerning regulation in the financial services markets:
· the first is popular, indeed populist, but unlikely to be effective – direct regulation of bonuses. But in the long run this sector-specific incomes policy would be unenforceable. It would take investment banks no time at all to work out ways round such rules, for instance, shifting people from employee to self-employed status.
· the second is clearly appropriate and the essence of the regulatory response – higher capital requirements. The past capital regime for trading activity was not just a bit wrong, but radically wrong, based on simplistic faith in value-at-risk models simplistically applied, and on the unjustified assumption that presently liquid markets would always remain so. It allowed major trading banks to trade complex and risky instruments with clearly inadequate capital support.
· the third may in practice be impossible to agree but should not be excluded from debate – financial transaction taxes. Anyone who thinks such taxes would prevent all or even most rent extraction in the financial sector, or that they could be designed to tune the liquidity of markets to precisely its optimal level – neither too liquid nor insufficiently liquid – is fooling themselves. But in the real world of imperfect instruments we seek results at least a little better than those we see today, so they should not be excluded from consideration.
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