Speaking at the Reserve Bank of India in Mumbai, FSA chairman Lord Turner said that both the Asian crisis of 1997 and the recent crisis had made clear that expansion in the scale and sophistication of financial activity is not always beneficial to the global economy.

Lord Turner said that policymakers need to indentify the fundamental drivers of past, as well as the latest, financial crises and should be open to policy options that have been excluded by the free market consensus of the last two decades:

• Developed countries should consider macro-prudential tools to control credit expansion – particularly in an upswing.  This could be done by countercyclical variations in banks’ capital or liquidity requirements, which may need to be applied at a sectorally specific level (for instance to constrain commercial real estate lending).

• Policy instruments such as taxes which place constraints on short-term speculative inflows may be particularly relevant for some emerging economies.

• A variety of levers focused on ‘putting sand in the wheels’ of short-term speculative trading should be considered.  Increasing capital against bank trading activities is the key priority but transaction taxes should not be excluded, despite the practical difficulties of implementing them.