The Bank of England and other financial authorities should disregard fears of regulatory "balkanisation" and take unilateral action to ensure stability within their own national jurisdictions, according to Lord Turner, the former head of the Financial Services Authority.
In a challenge to orthodox opinion among central bankers and regulators, Lord Turner argued yesterday that official intervention to restrict cross-border capital flows should not automatically be regarded as undesirable, and could well prove a "good thing" for the global economy.
"Talk of such policies is often met by objections that this will lead to a dangerous 'balkanisation' of global capital markets, preventing the free flow of capital and stymieing its allocative efficiency benefits," he said, speaking at a conference in New Delhi. "But since the evidence for the benefits of financial integration is at best elusive and ambiguous, some 'balkanisation' of short-term international debt markets could be a good thing".
This interventionist sentiment appears to put Lord Turner at odds with Mark Carney, Governor of the Bank of England, who explicitly warned last year of the dangers of financial regulatory fragmentation. At a speech in October, Mr Carney said such moves were a threat to "the efficient operation of the international financial system and accordingly London's competitiveness".
Lord Turner, who was chair of the FSA between 2008 and its abolition last year, was an unsuccessful candidate to succeed Mervyn King as the Bank's Governor.
Lord Turner added yesterday that big foreign banks should be required to establish separately capitalised subsidiaries, rather than branches, when they operate in third countries. "It would place some limits on the ability … to fund rapid credit expansion out of globally flexible liquidity pools, contributing to bonanzas of credit expansion often followed by sudden stops," he said.
That too appears to be at odds with the thinking of the Bank of England, which said recently that foreign banks should be allowed to establish a commercial presence in London as branches.
However, in line with Lord Turner's thinking, the Bank is planning to set up its own macro-prudential regime which could go beyond international standards. In a policy statement yesterday it outlined the tools it could use to cool another UK lending boom.
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