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FSA says banks should mimic utility companies

The FSA has called on banks to be more realistic in their expectations of investment performance and behave more like utility companies in mapping returns against risk.

FSA banking sector director Thomas Huertas said at the International Centre for Financial Regulation inaugural conference earlier this week, that by accepting lower short term returns and reducing risk, banks could offer better value for shareholders over the long term.

He said: “In the boom there was a view that banks could have the best of both worlds: that they could attain high rates of return on equity year in and year out.

“But it is virtually impossible to achieve year in and year out a rate of return on equity that very substantially exceeds the risk-free rate of return.”

Huertas said that banks should have more realistic aspirations.

He said: “Some might say that this smacks of utility regulation, of capping returns, and that this would be harmful to shareholders.”

But he said buying back stock at the peak of the market only to sell vast quantities of it to the Government at the trough has “not been a brilliant move”.

He said: “From the perspective of March 2009 utility shareholders have fared rather better than bank shareholders, whether the starting point is year end 2006, year end 2004, or year end 1999.”

He added: “So my question to shareholders and directors is whether banks would be better off shifting their emphasis from maximising returns, full stop, to minimising variance around a somewhat lower, but still significantly positive return, well in excess of the return on risk-free government securities.”

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