“We don’t know much about financial regulation, but we know what we don’t like.” The people have spoken and Lord Turner has listened.
His review could have marked the Financial Services Authority’s chairman out as the supervisor’s supreme hand-wringer, an academic complement to its chief arm-twister, Hector Sants, the chief executive. The latter’s pugnacious Be Afraid, Be Very Afraid speech last week laid out a much tougher operational stance for the UK’s financial regulator. Lord Turner’s review was always bound to take a loftier approach.
But for all the report’s careful crafting and inherently complex subject matter, Lord Turner is no less blunt than his henchman. Farewell “light-touch” regulation, which the FSA chairman unsurprisingly agrees has now been consigned to the dustbin of history. Goodbye and good riddance to financial innovation, buried, along with the rocket scientists that fuelled it, by Lord Turner’s damning conclusion that much of it was “of minimal social value”. Hello, utility banking, with its lower returns (and lower risks).
The FSA rarely even burps without submitting its emissions to a rigorous cost-benefit analysis – and, sure enough, its accompanying discussion paper does include a more detailed look at the risks of imposing higher capital requirements, from higher borrowing costs to lower macroeconomic growth. But the strong message of the Turner Review is that such costs are likely to be far outweighed by one simple benefit: what has just happened will never happen again.
The sacrifices he proposes should not be made lightly, however. It seems almost reckless to campaign for the continued competitiveness of the City of London at this point. The Square Mile’s public reputation is at an all-time low. But Lord Turner’s bold effort to set the tone for international regulatory reform could founder – and UK financial services suffer – if his central gamble that the FSA’s global partners will follow its lead does not pay off.
He made clear on Wednesday that in a number of areas – from capital adequacy to remuneration – the FSA’s proposals tally with those of international bodies such as the Financial Stability Forum. He must presume, then, that the UK’s stock in such gatherings is still high enough to allow it to lead the debate. It’s a risk. By throwing his weight behind a new pan-European institution with the power to set standards of financial supervision, Lord Turner could hand a free pass to continental European politicians. Some of them have waited years for their moment to trample over smug assumptions of City superiority. At the least, the FSA boss could set up a series of bruising “defeats” for UK interests over the detail of future European directives on financial services.
But the cruel fact is that Britain probably has no option. It must try to lead the way out of the morass. The alternative is to be forced to adopt others’ wackier reform proposals. Lord Turner has a shrewd political sense. While he is intellectually opposed to separating “casino banking” from “utility banking”, for instance, he also recognises that Germany, for one, could not practically agree such a step, and that Britain would be left isolated on the issue. On that basis, we have to hope he has correctly identified a once-in-a-century opportunity to start a race to the top in banking regulation – even though history shows that most contestants for financial supremacy end up running in the opposite direction.
Related links:
The Turner guide – FT Alphaville
FSA calls on banks to hold more capital – FT.com