Business

Lord Turner: 'Blame the policymakers more than greedy bankers'

BBC business editor Robert Peston on the regulation of City pay.

After the impassioned demand by the Deputy Prime Minister, Nick Clegg, for bankers to stop paying what he called sky-high bonuses, the UK's top regulator has said that regulation of City pay is indeed needed to reduce incentives for excessive risk-taking.

But, in what may be seen as something of a rebuff to Mr Clegg, Lord Turner, the chairman of the Financial Services Authority, added that the UK has to "move beyond the demonisation of overpaid traders".

Lord Turner also told an audience of grandees at the Mansion House that individual greed and error was less of a contributor to the banking crisis of 2008 than a wrong-headed approach to the regulation of banks and the economy.

So he is encouraged by the latest international agreement by central bankers and regulators, the so-called Basel lll agreement, that will force banks to hold more capital as protection against future losses.

However, Lord Turner conceded that if he were designing a relatively safe and stable financial system from scratch, he would force banks to hold yet more capital.

The perfect solution wasn't available, because Lord Turner and his colleagues on the Basel Committee on Banking Supervision were acutely aware that while banks are building up their reserves of capital, they tend to lend less (even if there is no evidence that banks lend less as and when they have accumulated the requested capital).

The Basel Committee had to compromise on a lower target for capital ratios, Turner said, so as not to undermine the global economic recovery.

That said, Lord Turner is determined that the very biggest banks (the notorious "too-big-to-fail" banks) will become much less dependent on the implicit protection of taxpayers, by instituting new legal arrangements that would force the creditors of those giant banks to convert their loans into loss-absorbing equity during a crisis - in a process known as a bail-in (as opposed to a bail-out).

That would add an extra layer of protection before banks came cap in hand to us, the taxpayers.

But such new funding arrangements could be expensive for banks, because their creditors would demand extra interest for the additional risks they would be taking away from taxpayers.

Which raises two questions.

Would these costs be passed to customers, especially to businesses which presumably feel they can ill afford to pay more for credit?

And, if banks were obliged by competition to absorb some of these increased funding costs themselves, would some of the bigger investment banks - those that are more dependent on the de facto subsidy of the taxpayer safety net - become unviable, obsolete, forced to liquidate themselves?

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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