FSA chairman Lord Turner has laid out the difficult trade off between strengthening banks to cope with future crises and encouraging lending and economic growth and warned further policy interventions may be required.
In his Mansion House speech in the City last night, Turner (pictured) said the current combination of fiscal measures “lies far outside past orthodoxy” and suggested further “innovations” may need to be considered should existing schemes such as Funding for Lending fail to boost the economy.
Turner did not give an indication of what extra measures could be considered but BBC business editor Robert Peston suggests the Bank of England could effectively write off some of the £375bn of Government debt acquired through quantitative easing.
Turner said a package of measures had been introduced to try to strike a balance between lending and resilience, including the Bank of England’s Funding for Lending scheme. The scheme allows lenders to use Treasury bills to access money at cheaper rates and encourages lending by making every pound of additional lending eligible for the scheme.
Turner also said the FSA had played a role by adjusting its capital rules to allow loans and mortgages made through the Funding for Lending scheme to be based on capital buffers already in place.
But he argued there was a need “to be ready if these measures prove insufficient to consider further policy innovations” to tackle the risk of a prolonged economic slump.
He said: “This is an innovative combination of policies, and one which lies far outside past orthodoxy. And we need to be ready if these measures prove insufficient, to consider further policy innovations, and further integration of different aspects of policy – to overcome the powerful economic headwinds created by deleveraging across the developed world economies.”
Turner likened his role, which he took up in September 2008, to being made “captain of the Titanic after we had hit the iceberg but before we actually sunk”.
He said the challenge now was to transition to a better financial system while not harming recovery. He warned if policymakers are not careful the downward pressure on growth could last for many more years.
Turner said: “For the last year, the Financial Policy Committee has been struggling with a trade off. We want to make our banks more resilient to future shocks, and in the medium term that will be good for credit supply to the real economy. And greater resilience requires further progress towards the adequate capital ratios we did not have in place before the crisis.
“But if we simply demand higher capital ratios, and if banks achieve them via deleveraging, that would be bad for credit supply and bad for economic growth. So we face at least a short-term trade off between resilience and lending.”
Turner said the road to recovery was further hampered by the eurozone crisis. He said without a European banking union, based on central supervision and guarantees that remove the need for taxpayer support, the eurozone cannot survive.
He added: “The UK, while remaining within the European single market, does not need to, and will not be part of that eurozone banking union. But we have an enormous national self-interest in the eurozone either taking the steps required to succeed, or if that is politically unattainable, dissolving in a controlled rather than chaotic fashion.
“We need to use what limited influence we have to help achieve the best possible way forward.”