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U.K. Financial Services Authority Chairman Adair Turner said tougher regulations aimed at strengthening the banking system can only reduce the frequency of financial crises and taxpayer-funded bailouts.
“The honest truth is that if you believe you have forever completely destroyed the possibility of a taxpayer input, we’re probably fooling ourselves,” Turner said at a hearing of the U.K. Parliament’s Commission on Banking Standards in London late yesterday. “But if we are successful, we are reducing the periodicity of a taxpayer input from once every 50 years to once every 200 years.”
Turner, seen as a potential candidate to succeed Mervyn King as Governor of the Bank of England, said it has been a “learning process” over the last four years and his thinking has changed as the true extent of the financial crisis emerged. He said there is a need for a “belt and braces” approach to regulation and the key issue is ensuring banks have an adequate level of capital to protect themselves.
“The core of resolvability is primary loss-absorbing capacity and bail-in-able debt,” Turner said. “And provided you have enough of that, then if proprietary trading activities produce losses, we can make sure those do not fall on the taxpayer or on a systemic shock to the industry, but are absorbed by the appropriate bail-in-able senior unsecured debt. That’s very important.”
The banking commission is currently scrutinizing the U.K.’s Banking Reform Bill and plans to report on Dec. 18. King, Bank of England Deputy Governor Paul Tucker and Andrew Haldane, the central bank’s executive director for financial stability, will attend the commission on Nov. 22.
Turner is at odds of 7-1 at Paddy Power Plc (PWL) to become the next BOE governor, meaning a 1-pound winning bet would yield a 7-pound profit. Tucker is the favorite, at odds of 1-3, while the second favorite is Terence Burns, former Permanent Secretary at the Treasury, at 13-2. John Vickers, chairman of the Independent Commission on Banking, is also 7-1.
Turner said that there is a need for both “structural proposals” to strengthen banks, such as those put forward by the ICB on the ring-fencing of consumer units, and “robust proposals” on capital and liquidity in the aftermath of the crisis.
“We have to recognize that it was deeper and more fundamental and with more adverse consequences than was apparent in 2009,” he said. “As this crisis and post-crisis has gone on, like many people I’ve been increasingly aware of what a deep set of problems there are in our banking industry.”
Turner also said it’s too simple to blame investment banking alone for a decline in the “culture” of banking.
“The culture of classic commercial banking was probably contaminated by three different things -- one of which was an investment banking culture that everything is there to be traded and make money from in the short term,” he said. Still, there were other issues -- the selling of financial products to the public without “appropriate constraints” and a too-heavy focus on return on equity,’’ he said.
“In many sectors of the economy there is nothing wrong” with a focus on ROE, “but I think applied to banking that is potentially dangerous,” Turner said. “That’s because in banking the easiest way to boost return on equity is simply to boost leverage, either in direct open ways or in a set of hidden ways.”
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