Reforms must go beyond 'demonisation' of traders

Lord Turner, chairman of the Financial Services Authority (FSA), said rules instead needed to address the fundamentals of what caused the financial crisis, although he stressed it was right to crackdown on "absurd" bonuses.

In his Mansion House speech last night, he said "ill-designed policy is a more powerful force for harm than individual greed and error".

However, he said recent Basel III banking rules to prevent a repeat of the financial crisis would be a major force for change.

He defended the new requirements - unveiled earlier this month to boost capital reserves held by banks - against critics suggesting they do not go far enough.

There have also been fears that the decision to more than double the amount of spare cash banks must hold on their balance sheets could damage lending and hold back economic recovery.

Lord Turner said: "If we were philosopher kings designing a banking system entirely anew for a greenfield economy, should we have set still higher capital ratios than in the Basel III regime? Yes I believe we should.

"But starting from where we actually are, the Basel III reforms will significantly improve the resilience of our banking systems without harming economic recovery."

He added that the coalition Government's plans to scrap the current FSA model to create two bodies and hand bank supervision powers to the Bank of England would improve regulation.

While not without its challenges, he said the move would create a "new structure which works well".

The FSA aims to have split itself internally in two by next spring and within two years complete the change to form a Prudential Regulation Authority (PRA), which will be a subsidiary of the Bank of England, and a new regulator called the Consumer Protection and Markets Authority.

There will also be a Financial Policy Committee to help maintain financial stability by taking a top level view to identify and stamp out risks as they emerge - "to take away the punch bowl before the party gets out of hand," according to Lord Turner.

He said change was needed after regulators in the UK and worldwide failed to spot and prevent the causes of the banking meltdown.

Lord Turner stuck by his controversial comments made last year that risky financial products were "socially useless".

"There were some absurd bonuses for excessive risk taking: there was an explosion of exotic product development which last year I labelled as 'socially useless', a phrase from which I in no way draw back."

But he said "we need to move beyond the demonisation of overpaid traders" to ensure a similar banking crisis does not happen again.

Also speaking at the City Banquet, Bank of England chief cashier Andrew Bailey - who has been appointed deputy chief executive of the incoming PRA - said that in the run-up to the crisis, regulators forgot that maintaining financial stability was "a duty that we all owe to the public".

"The fact of the matter is that the public has every right to expect us to act in their interest", he said.

And in his opening remarks, Lord Mayor of the City of London Nick Anstee urged the Government to avoid splitting up the banks and any further taxes on bonuses.

His comments come ahead of a report on Friday from the Independent Banking Commission that will set out the focus of an investigation into whether or not to break up the big banks.