THE chairman of Britain’s financial watchdog fired a fresh shot across the City’s bows last night, calling for tough limits on financial speculation by bank traders and hedge funds.
Arguing for a dramatic break with three decades of conventional wisdom, Lord Turner advocated a tax on financial transactions and said proprietary traders should face strict capital and borrowing rules.
In a wide-ranging speech, he went on to suggest the bundling of assets such as mortgages into securities should be restricted and that home loans should be harder to get hold of.
Lord Turner told an audience at the Cass Business School in Oxford he did not regret controversially describing banks’ riskier activities as “socially useless” in the aftermath of the credit crunch. But he added: “I think it would have been better to use the phrase ‘economically useless’.”
The remarks will send a shiver through the Square Mile as uncertainty grows over the direction of regulation. Industry figures warn a “Tobin tax” would be near-impossible to orchestrate globally and say that overly harsh capital requirements would suck up market liquidity.
Questioning whether liquidity and product innovation had benefited the UK since the “Big Bang” of the 1980s, Lord Turner continued: “A crucial issue is whether this increased financial intensity has delivered value-added for the real economy – whether it has improved capital allocation, increased growth or increased human welfare… And whether it has made the economy more or less volatile and vulnerable to shocks.”
Lord Turner said the FSA was as guilty as other regulators of buying into the “rosy vision” that complex securitisation would balance risk throughout the financial system. He said a crackdown on securitisation would find support because “the marketplace is likely to demand simple and transparent structures” after being burnt by products such as sub-prime debt parcels.
Lord Turner ended by demanding a sweeping overhaul of the UK’s regulatory landscape. He said: “We need to radically challenge some of the assumptions of the past 30 years.”