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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