Banks are forgetting lessons of crisis already, warns Turner
FSA chief proposes a tax on size to stop institutions becoming 'too big to fail'
Wednesday, 24 June 2009
Financial institutions in the City of London are in danger of reverting to the worst excesses of the recent past behind a "business as usual" attitude, the chairman of the Financial Services Authority warned yesterday.
Answering questions from MPs on the Commons Treasury Select Committee, Lord Turner said: "I do have some concerns that we may see a more rapid return to risky trading activities than we had anticipated... There is a real danger we don't seize the opportunities of this crisis."
He added that he was concerned about "aggressive hiring" by the trading operations of the banks as they strive to attract new staff, moves that would ignore the lessons of the "biggest financial crisis in the history of capitalism". The peer's call for restraint came as news emerged that Royal Bank of Scotland had awarded Nathan Bostock, its new head of restructuring and risk, 1.18 million shares in the bank, worth £463,000, when he was appointed this month.
There are no performance criteria attached to the shares, in sharp defiance to calls from Lord Turner and the Governor of the Bank of England, Mervyn King, that the structure of bankers' pay must be tied to the risks they take. On Monday, RBS confirmed that its new chief executive, Stephen Hester, could qualify for a package totalling £9.6m. RBS is 70 per cent owned by taxpayers.
Lord Turner refused to comment on individuals but said: "It is actually incredibly important for us to realise the enormous intensity of the crisis 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, there could be some drawing back from the degree of radicalism we require."
As the committee debated whether some banks should be prevented from becoming, "too big to fail", the peer proposed the idea of a "tax on size". Increasingly onerous and costly capital requirements could, he suggested, be levied on banks as they became larger or indulged in riskier activities. That would be an alternative to the crude separation of investment and retail banking that some have suggested as an option for the future.
In his speech to the Mansion House last week, Mr King said that might be one way of dealing with the problem of "moral hazard". Lord Turner replied that his "tax" was, "an idea that we need to think about and think about at a global level". He said he preferred a "sliding scale" of capital requirements, and expressed scepticism that banks could be made small enough to be allowed to fail without much wider risk to the financial system. He added: "I have some doubts as to whether we would be able to get them small enough that they could fail without systemic concerns."
Following some biting criticism from MPs about the FSA's role in the collapse of Northern Rock, Lord Turner said his organisation was now doing "fundamentally different" things, and insisted: "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 an FSA presence on the Bank of England's Financial Stability Committee, which has just been formed. "We should have a joint financial stability committee chaired by the Bank of England Governor," her said. "If we don't do that, we will create unnecessarily competitive behaviour and a lack of co-operation."
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