Speaking in front of the Treasury Select Committee this morning, Turner refuted the narrow bank proposals preferred by Bank of England governor Mervyn King as “a new version of pre-crisis wisdom”.
Last week, speaking in front of the Which? Future of Banking Commission, King said that regulation must concentrate on narrow banks holding retail deposits and allow a lighter touch on any riskier banking business outside the “firewall” of UK savers’ money.
King said: “Instead of trying to regulate in great detail every aspect of the behaviour of the industry as a whole, the approach is to identify what things are absolutely critical to the system.”
But Turner told MPs this morning that this plan will not solve the problems of banking regulation. He said: “Lehman Brothers was not a deposit taking bank, but was systemically important. Any idea that we can define narrow banks and then take a hands off approach to the rest of the system, far from being intelligent radicalism, is just a new version of the pre-crisis conventional wisdom that if only we could identify and remove some specific market imperfections, financial instability would disappear.”
Turner told MPs that he had been in discussion with former US Federal Reserve chairman Paul Volcker with regard to the new US banking rules announced last month by President Obama. He said the Financial Stability Forum must take on board the American plans to limit the amount of propriety trading deposit-holding banks can do.
He said: “Having discussed this with Paul Volcker, I believe we are in full agreement on the means and that capital requirements for trading activities will be key.”
Turner also argued against the principle of ‘too big to fail’ for being the main cause of the financial crisis. He said: “If the big UK banks which needed to be rescued in autumn 2008 had been multiple smaller banks, we might still have had just as much over exuberant lending to commercial real estate developers, funded by risky short-term wholesale deposits.
“Tighter capital and liquidity requirements on all banks, and new counter cyclical macro-prudential tools which constrain credit supply in the upswing, may be even more important than fixing the too big to fail problem.”