Lord Adair Turner, chairman of the FSA, has been giving evidence at today’s Treasury Select Committee hearing on ‘Financial institutions – too important to fail?’ in London.
He said the regulator is looking to use recovery plans to encourage banks to structure themselves into separable legal entities and introduce restrictions on the breadth of activities which different types of banks can perform.
He also argued against the principle of banks being ‘too big to fail’ as being the main cause of the financial crisis.
He said: “If the big UK banks which needed to be rescued in autumn 2008 had been multiple smaller banks, we might still have had just as much over exuberant lending to commercial real estate developers, funded by risky short-term wholesale deposits.”
Turner also warned that the idea of narrow bank proposals holding retail deposits, which is favoured by Bank of England Governor Mervyn King, would not solve any problems.
He also mentioned a difference of opinion with Paul Volcker, President Obama’s adviser, who wants to see a plain ban on bank trading unrelated to customer service.
He said: “I believe the idea that there is some fundamental divergence between the Volcker proposals and the way the Financial Stability Board (FSB) is addressing this issue is a confusion in an important debate.”
Regulators and banks became complacent due to an uninterrupted decade of economic growth, and believed it would never end, he said, and there now is a need to ensure the right regulation is in place to prevent similar system risks arising in the future.
Recommendations will be made before the G20 summit in Seoul in November.
