Davos: FSA chief calls for credit supply control

Posted by admin in Risk & Regs on Thu, 28/01/2010 - 15:40

The chairman of the Financial Services Authority (FSA) has said that controlling interest rates is no longer enough and is calling for direct controls to be imposed on the supply of credit.

"We have to get back to the idea of controls on credit growth," said Lord Turner. “We need new macro-prudential tools that directly focus on the supply of credit to those parts off the economy most likely to see bubbles. We need to do something about it. The tool cannot be the interest rate. It is too imperfect for that. The bubble can't be pricked with classic monetary policy."

Lord Turner argued that direct controls would help prevent the build-up of dangerous asset price bubbles. He called for a committee to be established that could combine the insights of central bankers and regulators, with input from outside economists to avoid the risk of "group think". Such a committee  - which he said would be national rather than international - would be able to target both borrowers and lenders.
 
"It would meet twice a year to look in a really really detailed way at what is going on," suggested Turner. "At the end of the day, the committee would decide whether to pull the necessary macro-prudential levers in a discretionary counter-cyclical fashion.”
 
Turner's comments are an extension of  the FSA’s conclusions of last year's Turner Review and a Bank of England consultation document on the same subject.  Lord Turner plans to expand on this thinking in a lecture in March
 

The Bottom Line:If Mr Cable has his way...

"If Mr Cable had his way, all the big banks would be broken up and bonuses would be virtually eliminated - a sure-fire way in my view of guaranteeing an end to the UK’s ability to compete as an international financial centre. Let’s not forget that this is a man who is on record as saying that everyone who works in a bank has an ‘aristocratic lifestyle’ clearly demonstrating his lack of understanding of the sector." A tough line on bankers’ bonuses could make a brain drain of financial talent a distinct possibility, warns Paul Marsden. Read more

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