At a Treasury select committee meeting last week, FSA chief executive Hector Sants and chairman Lord Adair Turner both criticised former political philosophies that led to “light-touch” regulation. They said the future lies in tougher policies on financial products and the hiring of senior banking staff.
Turner said the idea of regulating products, in particular, mortgages, will be “an open issue” which will be addressed later this month.
He said: “The issue we might have to address is whether you can ever imagine a regulator saying a product should not exist because it is too complicated. I certainly do not exclude it. There are some categories of financial product where we should simply say, we think this is too complicated for anybody to deliver in a risk-managed fashion.”
Turner said one issue that has to be decided is whether it is best to set maximum loan levels against the value of a property or borrowers’ incomes.
Turner said: “We can see considerable merit, both in relation to the defence of consumer interests and in relation to the macro prudential issue about guarding against excessive booms and busts.”
The FSA told MPs that one of its remits would be to assess the competency of senior executives.
Sants said: “Our former process was primarily focused on probity but we are changing that approach and will be judging competency for significant senior appointments at larger institutions, an interview process has now been established.”
Bank of England governor Mervyn King warned the Treasury select committee that the BoE needed more intrusive powers to control the way the banking sector worked. He also said the BoE needed to be more wary towards the ratings of assets and institutions.
King told MPs that the BoE was unequipped to deal with its new statutory objectives for monitoring the stability of individual banks.
He said: “For growing and living banks, we do not have a single power now that we did not have before. We only have the power of our speeches, our reports and the words we use in the tripartite process.”
He said the BoE needed to be able to demand information from banks.
“I find it very hard to see why, if people think the Bank of England should play a major role in financial stability, we should not have the right to request information from banks, we do not have that. We have to persuade the FSA and they have to make their own mind up,” he said.
King hinted that, in future, the BoE would take a much more dim view towards ratings of assets.
He said: “In the Bank, we are going to think very hard about the extent that we and other central banks rely on credit ratings as an indicator of access to our operations. There is a good deal to be said for downplaying credit ratings in its entirety. The credit-rating agencies did move into areas where they did not have appropriate expertise and there were conflicts of interest.”
King also told the committee that the newly created asset guarantee scheme could very well lead to a nationalised “bad bank”. He said: “A split between a good bank and a bad bank is feasible, the difference between that and insuring assets is a matter of degree, it is not a connotative issue.”
But King added that this could not be hurried, saying: “I am not keen on the taxpayer rushing in to buy assets before we know what the price is, that is why we must wait until the end of the process. But at the end, I am certainly attracted to a process that cleans up and restructures the banks’ balance sheets, that is absolutely vital. That was the lesson from earlier banking crises. We have to get to grips with things and realise that the balance sheets have to be cleaned up.
“Only at that point will you have a good bank that people will have confidence in and can return to normal. The sooner that happens the better but we have to take the time to analyse the state of the balance sheets first.”
Both the FSA and the Bank of England are confident that their new approaches would help guard against a future crisis. King said there must be “someone to put sand in the wheels of the expansion of the financial sector” and raise the capital requirements as the rate of growth of the “excessively exuberant” banks, or counter-cyclical capital requirements.
Turner said: “It is a revolutionary approach. Both us and the Bank of England should have a significant and formal role in macro-prudential analysis.”
Sants said: “I do believe for the last 12 months we have put in place significant changes to our supervisory processes. We look at the business, we look at the risk and we look at the future of the banks – we are a fundamentally different organisation than we were 12 to 18 months ago.”
King said: “One of the lessons that old-time banks supervisors always used to tell us was there are only two types of banks you have to be careful of – banks that are losing money and banks that are making too much money. We should not indulge in self-congratulation, we should say hang on, there are too many risks here.”