Adair Turner warns against ‘the stability of the graveyard’

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Financial Services Authority (FSA) chairman Adair Turner warned last night against building “the stability of the graveyard” when tackling financial reforms in what is viewed as his last public pitch to succeed Sir Mervyn King as governor of the Bank of England.

In his Mansion House speech, Turner said the country needed “a sounder banking system for the future” and should be prepared to turn to more innovative measures to tackle economic challenges.

Turner said the first eight years of the FSA’s existence seemed “plain sailing” but added: “That was a delusion, the vulnerabilities relentlessly growing, but we didn’t spot them.”

He said the financial crisis was created by excessive borrowing, light regulation and over-complex financial innovation, as well as the inherent flaws of the “eurozone project”.

He went on: “We need to build a sounder banking system for the future, and many of the reforms needed to achieve that are already in hand. But we also need to ensure that the stability we build is not the stability of the graveyard.”

Turner said new regulation structures – which will replace the FSA – were well designed, but added: “We will need to use them well and to be open to further policy innovations if we are to overcome the deflationary headwinds we face.”

He called for support from outside to “influence as best we can the redesign of the eurozone, to ensure that our domestic efforts are not undermined by headwinds from abroad”.

Separately, the European Union may delay the time when banks need to start introducing tougher bank capital rules by up to a year due to warnings from lenders over higher costs.

According to Bloomberg the start date for Basel III could now be delayed from 1 January 2013 to as late as 2014.