In a speech at Mansion House, Turner suggested that the overhaul of the regulatory system being brought in by the coalition government might not be able to smooth out the economic cycle, which had been hailed as its main purpose.
“Macro-prudential policy in downswings may at times, like interest rate policy, be ‘pushing on a string’,” said Turner.
In theory, the new regulatory system is meant to prevent excessive credit booms by tightening capital rules, and to stimulate the economy by doing the opposite during a bust.
But Turner said that in a bust: “Uncertainty could argue for higher capital levels to mitigate market concerns about solvency and thus help to reduce pressures in funding markets.”
That means there would be no let-up in capital rules even in a slowdown like the one currently gripping Europe.
Turner also argued that even if regulators loosen the rules: “We cannot be sure that the banks will use this flexibility to support lending to the real economy.”
The FSA chief, who now sits on the newly created Financial Policy Committee (FPC), charged with designing the new regulatory powers, also restated his case that the UK should be allowed to goldplate any rules that come from Brussels.
Britain is currently in talks with the EU over whether countries will be allowed to impose capital rules above and beyond the version of Basel III imposed by European authorities.
The EU, he said, “should leave national authorities free to exceed and vary them above the minimum”.
UK banks are strongly opposed to this approach and, as City A.M. reports today, the Treasury is sympathetic to their case.