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Lord Turner and the G20’s new bank regulations

I was asked to comment on Lord Turner’s speech today, which he made at the Mansion House last night.

Lord Turner is the Chairman of the Financial Services Authority (FSA), having taken over a year ago from Callum McCarthy, just as the crisis reached boiling point.

Reading through the transcript of the speech, it is clear that he is announcing the new regulatory drive in anticipation of the agreements to be announced this week by the G20 (he did the same in March, just before 1st April G20 meeting).

The speech can be summarised as follows:

People think I’m a heretic because I said parts of banking are ‘socially useless’ but I should know what I’m talking about as I was on the Boards of Standard Chartered and Merrill Lynch.

And look, Stephen Green who heads up HSBC and the British Bankers’ Association agreed with me, as he also said that ‘in recent years, banks have chased short-term profits by introducing complex products of no real use to humanity’.

But then both Stephen and I trained and worked at McKinsey together, and that shows we know what we’re talking about.

So when some City oik says he's not happy – in fact he's ‘appalled, disgusted and ashamed’ at my comments about the system being socially useless – I think about the victims of this crisis.

Don’t they have the right to be ‘appalled, disgusted and ashamed’ with you? (applause)

What this means in the future is that I want banking to be socially useful.

How are we going to do that?

By ensuring banks are:

  1. More risk averse;
  2. If they take bigger risks, they reserve more money to cover them; and
  3. We’re going to be breathing down their necks to make sure they do.

The reality is that banks must avoid over-complex products that have no direct value to society so, if they can’t explain what they’re doing in words a ten-year old can comprehend, then we’re going to shut down those risky products.

The question I ask is how does a regulator work out what is more risky and then how do they calculate how much a bank has to reserve against those more risky products?

I also loved the FT’s Alphaville review of the speech, which mentioned that a mystery man gave out leaflets detailing the FSA’s own bonus culture during his speech. Apparently, the FSA paid out £19.7 million in bonuses in 2008 — or about 15% of its staff costs.

No wonder Lord Turner is saying that, as long as a bank can prove it has reserved the right levels of capital, then whatever bonuses they want to pay staff is up to them.

There will be no cap.

I’m not so sure the French would agree.



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About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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One comment

  1. British Bankers’ Association here. Cracking post.
    A bit more context abotu Lord Turner’s use of a quote from our chairman. Stephen Green’s speech in Frankfurt in September can be read in its entirety at http://www.hsbc.com/1/PA_1_1_S5/content/assets/newsroom/090908_speech_frankfurt.pdf.
    Stephen Green said:
    “At our best, what we do allows businesses to supply products and services that customers need; allows individuals to own homes and cars; to save for a rainy day and for retirement; and to protect themselves and their businesses against the unpredictable. If we care about human freedom and human well-being, we cannot do without these functions.
    “But at their worst, financial markets can be engines of destructive excess. In recent years, banks have chased short term profits by introducing complex products of no real use to humanity. It is clear that very many innovations introduced by the financial markets have been socially useful, and indeed are critical to economic and social development to our prosperity, in short.
    “But it is equally clear that some parts of our industry had become overblown, and that certain products and services failed the tests of usefulness, suitability and transparency.
    “If we are to regain the position of trust and confidence that is a fundamentally important mark of social and economic health, the financial industry will need to learn the lessons of a crisis that has shocked and frightened the world.”

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