Banks 'forgetting harsh lessons from crisis'

Published on Tuesday 23 June 2009 22:51

THE head of the City's financial watchdog has warned that banks are already in danger of forgetting the lessons of the financial crisis.

Lord Turner, the chairman of the Financial Services Authority (FSA), told MPs on the Treasury select committee he was worried about a lack of will to drive through reform, as memories of the turmoil fade.

The chairman, speaking a day after news of a 12 million pay and shares offer for the chief executive of the part-nationalised Royal Bank of Scotland emerged, said there was "very aggressive hiring going on" in the trading activities of investment banks.

He said: "I think it is actually incredibly important for us to realise the enormous intensity of the crisis that we have just been through.

"I think there is a worry that, because we are now seeing some positive signs and because of the exhaustion level of driving through the changes we require, that there could be some drawing back from the degree of radicalism we require."

He also called for an effective "tax on size" to prevent banks from growing too big.

Lord Turner said that higher capital requirements for larger banks would reduce the risks of failure.

Last week, Bank of England governor Mervyn King warned of tough choices ahead over the size of the banking sector – saying that if some banks were too big to fail "they are too big".

The FSA chairman said he preferred a "sliding scale" of capital requirements for banks depending on their size.

"I have some doubts as to whether we would be able to get them small enough that they could fail without systemic concerns," he said.

Lord Turner said banks were now being subjected to much more intense supervision by the regulator. The FSA's bolstered supervision team was doing "fundamentally different" things.

"(We are] using stress-testing in a far more intense fashion than we were previously. It is a very major change in the intensity of supervision."

Lord Turner also called for a financial stability committee chaired by the Bank of England governor or deputy governor, which would take decisions on financial stability in a similar fashion to the interest rate- setting Monetary Policy Committee.

There "very clearly needs to be close co-ordination" between the regulator and central banks, and a joint committee would prevent "wasteful competition" between the two organisations, he said.

BATTLE OVER 'FREE IF IN CREDIT' SERVICES

THE future of "free if in credit" personal banking depends on the outcome of a renewed legal challenge by major high street banks, Law Lords were told yesterday.

Free banking was only made possible by the charges levied when customers went into unauthorised overdraft, the Lords heard.

Those charges "will necessarily exceed by a large margin" the real cost to the bank of dealing with unarranged overdrafts because they were "essential to the funding of the whole current account system", said Jonathan Sumption QC, for Barclays.

Mr Sumption was opening an appeal by seven major banks and a building society against High Court and Court of Appeal decisions.