Regulators bicker and bankers get back to business as usual

As the FSA and the BoE scrap over which polices the City, banks may be returning to their bad old ways.

by
Last Updated: 31 Aug 2010

The warning comes, ironically enough, from the head of the FSA itself, Adair Turner. He says that the re-emergence of ‘aggressive’ hiring by banks recently may signal a return to the bad old days of mega bonuses and systemic danger created by a devil-take-the-hindmost attitude to risk. Consequently he believes there is a real chance that the City will fail to learn the lessons of ‘the biggest financial crisis in the history of market capitalism’. Sounds bad, you must admit.

Turner’s stern words came days after Bank of England governor Mervyn King backed calls for sweeping new powers for the Bank to allow it to keep a much firmer hand on the fiscal tiller, and to help restore public faith in the banking system. But isn’t that the FSA’s job already..? Turner certainly thinks so, and has said the FSA would react badly to edicts from the Bank, and that ‘wasteful, competitive behaviour’ could result. A couple of kids squabbling over who’s got the biggest stick, in other words.

Turner’s problem is that things are going pretty much the Bank's way at present. The normally cautious King may well have been emboldened by Tory support, as the BBC’s Robert Peston reveals on his blog today. George Osborne plans, says Pesto, to relocate the centre of regulatory power firmly back in Threadneedle Street’s direction should his party win the next election.

So in reality Turner is fighting for the FSA’s life, and his proposed solution certainly cedes a lot of ground to the Bank’s supporters. Turner moots a joint  FSA/BoE Stability Panel modelled on the existing MPC. Chaired by King and populated by five BoE members and four from the FSA, such a panel would, says Turner, ensure decisions were made based both on Bank macro-economic expertise and FSA reports on individual organisations. It sounds like a sensible if somewhat bureaucratic solution, but will probably never happen.

Of course as this earnest debate drags on, the banks themselves have a golden opportunity to start back down the road to quick riches, while the attention of those whose job it is to rein them in is directed elsewhere. The row over Stephen Hester’s pay deal for fixing RBS demonstrates the self-serving line that the industry will take if it’s allowed to, as has the wider financial crisis.

We now know, or we jolly well ought to, that banks are incredibly efficient when it comes to generating massive short-term returns for themselves but that they neither understand nor care much about the long-term systemic effects of their activities. It’s what they do, and we would be foolish indeed if we expected them to change their ways without being forced to. So one way or another, this regulatory turf war needs to nipped in the bud before the chance for real financial reform is lost.


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