UK: King and Turner on financial regulation reform

Lord Turner, the FSA chairman, delivered a speech last month in Cambridge titled Reforming finance: are we being radical enough? The speech, available here (pdf), was wide-ranging and well worth reading. Lord Turner asked what is meant by radicalism, which problems need to be fixed and how, and he returned to themes on which he has spoken before including the debate about whether, to use his words, "increased financialisation has delivered commensurate added value"?

Lord Turner argued that there are good reasons for rejecting the view that all of the increase in financial activity has delivered real economic value; there are, he notes, good reasons to suspect that what has taken place is a mix of value added and rent extraction. He explored the consequences of this conclusion for policy-makers in his speech and, with regard to financial regulation reform, argued that much has been done but more needs to be done, in particular (to quote directly):

• Basel III is a major step forward, but in an ideal world, equity ratios would be set much higher.
• We must understand the drivers of shadow banking and guard against the re-emergence of new risks in new financial mutations.
• Complexity and interconnectedness are important in themselves, and specific regulatory action to offset the externalities created may be required.
• We need to make a reality of macro-prudential oversight and policy response.

This final point provides a link with the appearance yesterday before the Treasury Select Committee of the Governor of the Bank of England, Mervyn King. Dr King made clear how regulation by the Bank (and authorities under its auspices) would be different from the approach adopted by the FSA. A useful report of his comments is available here. A video recording of the Committee's questioning is also available: see here (Windows Media) or here (Silverlight).