The context

1. Who is Lord Adair Turner?

Adair Turner was appointed FSA Chairman in September 2008. He has combined careers in business,
public policy and academia. Lord Turner studied History and Economics at Gonville and Caius College,
Cambridge from 1974-78, and he was a college supervisor in economics at Caius from 1979-82,
teaching part time in parallel with his business career.
2. What is the FSA?
The FSA- Financial Services Authority is the regulator of the financial services industry in the
UK. It is responsible for considering the fairness of terms in many types of financial services
contracts, including those relating to:
● mortgages;
● general insurance;
● bank, building society and credit union savings accounts;
● life assurance;
● pensions;
● investments; and
● long-term savings.

3. Who is and what is the role of the Lord Mayor of the City of London?
Michael Bear is the current Lord Mayor of the City of London. The Lord Mayor of London's
principal role today is ambassador for all UK-based financial and professional services and to
provides business and local government services to the City.

4. Where was this speech given?

The City Banquet, The Mansion House, London on the 22 September 2009

The speech

1. What are, according to Lord Turner, the important positive roles of the financial
system?
Positive roles of the financial system:
The financial system plays a vital role of global trading and global capital flows. It allocates capital
to efficient use, lubricates the flows of capital and trade in a global economy. Market making and
liquidity provision delivers important but yet indirect economics benefit to the society.

2. What does Lord Turner say are the core functions of financial institutions? Expand
using Lecture 2.

Lord Turn believes the core functions of financial institution as follow:

● They provide savings and credit and payment products to customers or companies
which should deliver real hedging value.
● Source of high skilled employment
3. What does he see as the strengths and contributions of the City of London?

He believes London is good at providing financial services which the world needs. He also
thinks that London has a great potential to spread prosperity and opportunity. It is a vibrant and
major force in the UK economy.

4. In what way does he think the activities of the financial markets differ from those of
other markets?
It encompasses many specific activities: life and general insurance, both broking and underwriting;
equity trading and research and primary issuing: commodity and foreign exchange trading; basic
commercial banking, trade finance and project finance and private equity, and market making and
liquidity provision in numerous traded instruments. And the City is a centre of huge expertise in the full
range of these activities. It is, and will continue to be, a major provider of wholesale financial services
to the rest of Europe and the world

5. What have been the consequences of the financial crisis for the British economy?
This was the worst crisis for 70 years – indeed potentially it could have been the worst in the history of
market capitalism. Real disaster – a new Great Depression – was only averted by quite exceptional
policy measures. Despite these measures major economic harm has occurred. Hundreds of thousands
of British people are newly unemployed; tens of thousands have lost houses to repossession; and
British citizens will be burdened for many years with either higher taxes or cuts in public services –
because of an economic crisis whose origins lay in the financial system, a crisis cooked up in trading
rooms where not just a few but many people earned annual bonuses equal to a lifetime’s earnings of
some of those now suffering the consequences.

6. What does he identify as the main problems - highlighted by the current financial crisis
- with some financial activities?
The main problems are that some financial activities (which are profitable to financial service
firms) are actually “socially useless” and are of “no real use to humanity”.Another issue is to do
with the size of financial systems, Turner states that a large financial system is not necessarily a
a good one. He mentions that at times financial services generate high demand and returns
from their services causing instability in the system.

7. What was the FSA approach to regulation before the crisis?

Prior to the crisis FSA’s approach functioned around their assumption that financial innovation
was always beneficial, that new and more complex financial instruments were valuable as they
generated more trading and hence liquidity. They also believed that these complex financial
instruments were beneficial as they helped target clients/investors’ demands more precisely.
This outlook caused the FSA to think twice on things such as bans on short-selling financial
shares (selling assets that have been borrowed from a third party with the intention of buying
back identical ones at a later date to return to lenders), setting capital requirements (how much
liquidity is required to be held for a certain level of assets) and demanding risk reductions.
8. How and why should the role of regulators change after this crisis?

Regulators such as the FSA, operate to make sure the economy is receiving the best social and economic
outcome from financial institutions. After the crisis, the regulators have had to change their roles;
- The worlds financial Regulators, led by the International Financial Stability Board, will require global
banking system to be more prudent, operating with larger shock-absorbing buffers of capital and
liquidity.
- Impose much higher capital requirements against many riskier trading activities. The regulators will
have a bias to conservatism in their capital requirements for trading in complex and potentially risky
products where the benefit to the economy is unclear.
- At firm level, they will be imposing a more assertive style of provision, no longer willing to assume
that market discipline and incentives will always lead bank management to make optimal decisions.

The role of regulators needs to change because their previous mindsets was not ensuring that the financial
services industry was delivering its vital services in an efficient and risk- controlled fashion. There has
been a realization that not everything that a financial system does is socially useful, and hence the
regulators have changed their roles accordingly.

9. What is Lord Turner’s view on bonuses paid to bankers?

He feels that banks have high profits now because of the natural increase in market share of the survivors,
government guarantees and central bank liquidity support, very low interest rates, volatility, and large
government debt issues. However, he feels that instead of using these high profits as remuneration, high
bonus payments should be moderated. Priority use of the high profits should be to rebuild the capital
needed to support lending, allow official measures to be removed, and prepare institutions to meet higher
capital requirements.