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Categories:Regulation

"Punchbowl of excessive credit" must be taken away

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FSA chairman Lord Turner will today call for much higher capital and liquidity requirements across the banking system and macro-prudential policy tools to remove “the punchbowl of excessive credit”.

Speaking today at the London School of Economics, Turner will say that higher bank capital and liquidity requirements will create a more resilient banking system, less likely to be hit by a future crisis or banking failure.

However, Turner will warn such stability will make it harder to access credit. He will say: “We need to strike a balance, honestly recognising that the benefits of financial stability have a cost in terms of customer choice. In the light of the severe economic harm caused by the financial crisis a significant shift in the balance towards stability and resilience makes sense.”

Turner will say the new Financial Policy Committee will need to have at its disposal the necessary macro-prudential tools to limit credit supply at certain times, making decisions that are likely to be unpopular with politicians, businesses and the general public. These would include automatic or discretionary variation of capital or liquidity requirements across the cycle or borrower constraints such as LTV limits.

He will say: “The new body will need to be willing to take away the punchbowl of excessive credit when everybody else – property developers, householders, and the government as recipient of the tax revenue generated – is thoroughly enjoying the party. Creating a safer financial system requires not just action to prevent overpaid bankers selling overly complex products and taking undue risks; it also requires constraining a credit supply which in the upswing we all rather enjoyed.”

Yesterday, the FSA announced strict new rules on mortgage affordability. It proposed that every mortgage should be submitted with proof of income in a bid to crack down on mortgage fraud, a move that will effectively put an end to self-cert and fast-track mortgages.

The FSA is proposing even tougher affordabilty tests for borrowers with an impaired credit history but stopped short of cutting LTV limits for credit impaired borrowers.

In a separate speech yesterday at the British Bankers’ Association conference, Turner questioned whether the new Consumer Protection and Markets Authority’s remit should include competition policy as consumer interests could be better served with more intense competition, rather than more regulation.

Turner also warned the FSA’s shift to a more intrusive regulatory approach risks restricting consumer choice and imposing disproportionate regulatory costs on firms.

Turner said: “We need to strike a balance and to get that balance right, we need to debate it openly and explicitly with the industry, with the press, with the politicians, with society.

“And in establishing the new Consumer Protection and Markets Authority we should, I believe, use the opportunity to make debates about that balance more explicit and more open.”

Turner also pledged a crackdown on the “incentives, structures or products” likely to lead to poor customer outcomes and closer scrutiny of product development.

He said: “We are examining firms’ business models – following the money – to understand the drivers of profitability and the implications of firms’ strategies. And as part of this work later this year we will scrutinise reward structures for in-house sales staff, to assess whether sales incentives are well-designed to guard against misselling.”

CMS Cameron McKenna partner Simon Morris says: “Turner sees ‘the punchbowl of excessive credit’ as the root of all evil the regulator must be empowered to combat. This is fighting talk for the chairman of a soon-to-disappear regulator. It also misses the point, which is that we are part of a global economy, and imposing unilateral restrictions in the United Kingdom will simply drive away the ever-mobile bankers and financiers who power the City of London.”

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Readers' comments (6)

  • 'punchbowl of excessive credit when everybody else – property developers, householders, and the government as recipient of the tax revenue generated – is thoroughly enjoying the party', I'm not sure what party he's on about as most 'normal people' are struggling to get any help financially now as the banks are so desperate to hold onto any spare cash. Yes the old culture of getting as much credit as you want had to stop but now its almost impossible to get any credit from banks or credit card companies!

    Anyway, if he can let me know who's holding this party I'll be there with bells on!

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  • But will the 'punchbowl of excessive FSA salaries,bonuses and expenses' be taken away?

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  • Where was the advocate when the party started? Drunk on the very same punch and asleep on the sofa! Talk about a latent hangover!

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  • Agree with "the serval" this guys talks so much drivel it is just mad anyone listens.

    Saying such things now after our worst financial crisis in decades when everyone knows what went wrong and whose fault it was, the Government, the Treasury, THE FSA and BOE etc. is just like an old record.

    Any idiot could see when we had constantly rising property prices, easy borrowing and income multiples increasing every year so people could afford to buy, that at some stage that bubble would burst. You would also have thought that people such as Mr Turner would have warned banks, lenders and the Giovernment of the issue as part of their role to "protect the consumer". Did they hell ?

    Please someone put these bloated expensive ideologists out to grass and get some sensible people in or their won't be anything left to regulate.

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  • Well, there goes the property market. Choke off the supply of first time buyers by making them wait until they've saved sufficient deposits (should be about age 40) and the whole chain comes to a shuddering halt. I'm sure Lord Turner himself won't be affected though because I suspect he has little need of credit. He's probably got enough punch in his own 'private bowl' to survive very nicely thank you. As for those young people looking to get an invite to the party - well, surely they can rent pokey basement bedsits.

    What woolly thinking. Here's a thought
    Credit Rule 1 - With low LTVs, lenders can afford self-cert. If borrowers then lie about income, can't meet payments they lose their house. Punishment fits crime I think - and lenders exposure covered by equity
    Credit Rule 2 - Current incomes don't matter - it's future incomes that count and they can go down as well as up (as many public sector workers will soon find out).
    Credit Rule 3 - MIGs mantadory for all high LTV loans (only, this time, can we have these priced as rolling 5 year contracts - not the 25 year 'scams' we saw before).
    Credit Rule 4 - If you lend money then you may not package it up and sell it other than in it's pure original form
    Credit Rule 5 - Banks and Investment Banks are not the same species. Stop them from 'interbreeding'

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  • We are doomed...

    From where I sit regulation looks like one of those impossible puzzle drawings, a maze and a mirage. You know there is something there but it doesn't make sense - you can't solve it, you can't find your way round and when you try to touch it there is nothing there.

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