“Punchbowl of excessive credit” must be taken away

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.”