Adair Turner of the FSA is saying interesting things...

I thought I would share some links relevant to a very fine speech given by FSA chairman Lord Adair Turner on the role of banks in the economy.  A summary of the speech can be found here (some of which I share below).  The speech in its entirety as well as the lecture slides can be found here.

Two of the more memorable (and relevant...for me at least) passages of the speech are below:

"Adair Turner noted the huge growth in scale of the financial system over the last 15 years, driven by increased leverage in household and some corporate sectors, complex securitisation and trading. He said it was important to ask whether this growth had created ‘economic value added’. In addition to his point about policy tools to influence credit, he made two additional conclusions:

• The financial innovations of complex securitisation and credit derivatives may, if purged of their excesses, have potential to improve bank risk management, but the pre-crisis argument they created major economic efficiency benefits was hugely overstated. We need to recognise that securitised credit can increase the volatility of supply: so macro prudential tools, therefore, need ideally to be able to constrain securitised credit markets as well as on-balance sheet credit.

• We need a new philosophical approach to “market liquidity” which recognises that market liquidity is beneficial up to a point but not beyond that point, so that more liquidity, supported by more trading, is not always necessarily beneficial.  This implies a bias to conservatism in our setting of capital requirements against trading activity: it reinforces the case for limiting via capital requirements the extent to which commercial banks are involved in proprietary trading; and it may argue in favour of financial transaction taxes."