Adair Turner, current chair of the Financial Services Authority, spoke at Mansion House in what many are describing as an open pitch for the Bank of England governor role.
Addressing the house for the last time as chairman - Lord Turner is due to step down from his FSA role in spring - he claimed the FSA had been "brutally honest" about its failures during the economic crisis.
"In its supervision of banks the FSA made huge mistakes: and has acknowledged them – and changed radically in response," he said.
"But it’s important to place FSA supervisory failures in context, because if we tried to fix the problems of the past simply by supervising more intensely and better, we would fail to ensure a more stable system. Because still more important than poor supervisory approach were deficient rules, deficient structure, and dangerous culture."
The speech then went into detail about the nature of this "dangerous culture" which, in his view was "too driven by short-term return risks, too focused on sales and not enough on customer value... and with bank leadership continually seeking opportunities to increase leverage, generating higher returns for shareholders in the upswing, but increasing the danger that tax payers would end up bailing them out when the dance came to a halt."
Interestingly, he also claimed the UK's financial regulators were hamstrung by the structure of regulation, claiming the FSA was "asked to do to much" .
He also said there was a "gaping underlap" between the Bank of England responsible for monetary policy and
the FSA for the regulation of individual firms, and that neither was adequately focused on the systemic risks created by increases in leverage, booming credit supply and asset prices, and the development of shadow banking.
Lord Turner then hailed the introduction of the Prudential Business Unit, developed to provide more effective supervision, and the forthcoming Prudential Regulation Authority within the Bank of England, alongside the Conduct Business Unit - soon to become the Financial Conduct Authority.
On the Vickers Commission reforms, Turner supported implementing the recommendations, including separating the retail and investment arms of banks.
"By creating ring-fenced retail banks, and by demanding adequate levels of debt, these reforms will help ensure that all banks can be resolved rapidly without tax payers’ support and without harmful disruption of banking services to the real economy," he said.
Lord Turner will also discuss the global economic crisis - criticising those who backed the assumption that financial innovation had helped make the financial system more resilient and less vulnerable today to economic shocks.
"The dominant assumption was that monetary stability – low and stable inflation – was sufficient... to ensure... stability, and that the public authorities did not have to pay attention to financial innovation, increased financial complexity or increased levels of debt and leverage. That assumption turned out to be profoundly wrong and dangerous, a major intellectual failure," he said.
"If the Eurozone is to succeed it will (need).. what has come to be labelled a ‘Banking Union’, plus some fiscal integration. Without such union and integration the Eurozone cannot survive.
"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 20 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."
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