Banking regulation regime ‘flawed’

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The head of Britain’s City watchdog has denied that regulators could have spotted bank rate-rigging before the financial crisis, but admitted regulation was “flawed” and “dangerous” in the lead-up to the credit crunch.

Lord Turner, chairman of the Financial Services Authority (FSA), said regulators made “big mistakes” and would have to share responsibility with banks for restoring trust in the battered sector.

Lord Turner said there was an ongoing debate on whether regulators “could have been more alert” to Libor fraud at the height of the crisis, but said they could not have stopped fixing of the inter-bank rate without “prohibitively expensive” supervision.

The speech – his second in less than a week – is another strong attack on the pre-2008 regulatory system led by the FSA and the Bank of England.

An address to a business audience in Manchester last week was seen as a clear pitch to put himself forward as the next governor of the Bank when Mervyn King stands down next year.

Lord Turner’s public profile has been raised in recent weeks after Barclays revealed he had privately taken the bank’s bosses to 
task over its approach to City 
rules in the run-up to the Libor scandal.

In his speech in London, he gave a frank admission of the failings of the FSA and Bank of England before the financial crisis.

He said the UK had a “a flawed theory of economic stability” which relied on low stable inflation and ignored asset booms and “totally inadequate rules on bank capital and liquidity”.

Lord Turner outlined five recommendations for reforming the banking system, which included better regulation and ring-fencing retail banking from investment banking.

But the culture within banks needs to change, starting at the top. He added: “Rebuilding trust will be a huge challenge. Some of that challenge falls to regulatory authorities – we made big mistakes before the crisis.”