Address to the British Bankers' Association Annual International Banking Conference 2009
Speech by Adair Turner, Chairman, FSA
British Bankers' Association annual conference.
30 June 2009
It’s a pleasure to address the British Bankers’ Association annual conference. Since Callum McCarthy spoke here as FSA chairman last year, an enormous amount has changed. The global financial system has gone through the greatest crisis for at least 70 years, indeed on some measures the greatest financial crisis since the development of the modern market economy.
The extreme phase of that crisis is past, the dangers of extreme fragility reduced. And there are tentative signs of the beginnings of economic recovery – it is possible to talk of green shoots without fear of ridicule. The economic indicators are now mixed, rather than unrelentingly negative. Total mortgage lending is still falling, but that is due to the economically irrelevant contraction of remortgaging: lending for house purchase is growing again, albeit from a low base. House prices are showing some signs of stabilisation, after a less extreme fall than we might have feared. Lending to business is still clearly falling, but it remains difficult to discern whether the fall is more dramatic than expected in any recession – to disentangle the balance of demand and supply factors, though both are clearly at work. Forecasts of GDP growth, globally and in the UK, which were continually and dramatically cut between last October and this March, are now if anything edging up; and some analysts have revised down, slightly, their estimates of how high unemployment may go. We simply do not know how fast or slow the return to more normal conditions will be, but at least some indicators are beginning to look more favourable.
But even if the improvement in the economy ends up towards the higher end of current expectations, it would be totally wrong to take that as an excuse for complacency about the scale of what went wrong or about the extent of change now required. What happened between September and October last year was a near catastrophic collapse of confidence in the global banking system. The tentative signs of recovery that we are now seeing have only followed as a result of dramatic policy interventions – government guarantees, recapitalisations, and exceptional and enormous levels of central bank liquidity support. The economic impact of the crisis meanwhile has caused great harm to people in Britain and across the world – in lost wealth, income and employment. And in the UK in particular, the fiscal burden, partially created by the crisis and costs of intervention measures, will weigh on taxpayers for many years to come.
What we have been brutally reminded is how important and exceptional is the role which banks and bank-like institutions play in a market economy, how vital is confidence in banks and between banks, how potentially fragile that confidence is and how harmful if it is lost. And what we have learned also is that many of the intellectual assumptions of the years running up to the crisis – that markets are self equilibrating, that financial innovations which complete markets are definitionally valuable, and that market discipline is effective – were profoundly wrong.
It is therefore essential that we learn lessons and accept the need for radical change – change in the style of supervision, change in the regulations applied to banks, and changes in the banks themselves. We hope to return to more normal economic conditions: we must not allow a return to the ‘normality’ of the past financial system.
A new supervisory approach
For the FSA, and therefore for the banks, one major change is and will continue to be a major increase in the intensity and intrusiveness of our supervisory approach. Last spring, six months before I became chairman, the FSA published its Internal Audit report on its supervision of Northern Rock. It admitted past failures more openly than any other financial authority across the world. And it committed to a Supervisory Enhancement Programme which has been intensified still further as the full scale and nature of the crisis has become apparent.
This programme has entailed major increases in the resources devoted to the frontline supervision of high-impact institutions, in particular banks, and major increases in the specialist resources which support our frontline supervisors. But it has also entailed a major shift in the style and focus of our supervision.
We are now involved to a much greater extent than a year ago in the granular analysis of balance sheets, accounting practices and valuation approaches.
- We are analysing the maturity mismatches of banks with hugely increased intensity.
- We are now willing to challenge business models and strategies, rather than rely on the assumption that if a bank has appropriate systems and procedures in place, and is operating within the defined capital rules, that its strategy is therefore acceptable.
- We are now conducting interviews of key personnel – significant influence functions – to assess competence as well as simply probity.
- And we have dramatically intensified our use of detailed stress tests to assess – looking forward over five years and using adverse economic parameters – whether banks or building societies can meet our capital adequacy standards, and if not whether they have convincing strategies for meeting possible shortfalls.
Better supervision necessary but not sufficient: radical change in regulation required
Most of the aspects of the new approach have already been implemented, some are being further reinforced, some need to be completed; and in the future, the continual review of the effectiveness of our supervisory approach will be a key priority for the chief executive and his executive team, and for the chairman and the board. It will make a major contribution to creating a safer financial system for the future.
But it is also important to recognise the limits of what can be achieved by an intensification of supervision alone. Soon after I became chairman at the FSA, I was discussing the origins of the crisis and the role of the FSA and the Supervisory Enhancement Programme, with one of the FSA’s non-executive directors. He commented that, when six months before the FSA report on Northern Rock had been published, he rather wished that the press statement had read: ‘We made a complete hash of the supervision of Northern Rock and in future we will do much better. But even if we had done a perfect job within the global context and given the past regulatory approach and rules, it would have made almost no difference to the scale and shape of the financial crisis.’
I think he was right. Excellent supervision is a necessary but not sufficient condition for financial stability. We will do better supervision in future, but unless we change the rules quite radically, we will not be able to avoid future crises.
In March, the FSA published The Turner Review and an associated Discussion Paper. That Review set out a major agenda for regulatory reform. Other reports across the world – in particular those by Jacques de Larosière for the European Commission and Paul Volcker’s for the Group of 30 - have reached very similar conclusions. There is considerable agreement on many of the key changes needed to build a more robust future system, and the FSA is now intensively involved in the effort to reach global agreements on the way forward - through for instance the Basel Committee, and the Financial Stability Board, which met for the first time with its now expanded membership last Friday and Saturday.
We need to get on with implementing the obviously required changes. But we must also use the various reviews as stimuli to further thinking, recognising that it is impossible for anyone to get all the answers right first time. The Turner Review and its associated Discussion Paper were intended to stimulate a major debate. We have now received responses from over 75 organisations and individuals, including of course a major and thoughtful response from the BBA, and we will be considering these over the summer. And debates with international colleagues, and observation of financial industry developments over the last six months, continue to suggest new ideas and approaches which were not considered in the initial review and Discussion Paper. Moreover the Bank of England, in its Financial Stability Review published last week, has put forward some ideas which my Review did not consider, but which may well be required parts of a sensible package of reform.
It is therefore quite possible that there are some specific recommendations of The Turner Review which in retrospect will look not quite right; and it is certain that further reflection will argue for changes not proposed in the initial review. The FSA’s next step will be to produce another document, responding to the feedback and fine tuning our proposals, in the autumn, while getting on with the detailed design and then implementation of the clearly essential reforms.
Clearly essential reforms
One clear need is to get better at identifying emerging systemic risks – over-rapid credit growth, asset price bubbles, major changes in whole system maturity transformation – and to create tools which can act against these risks at the macro level. And I’ll come back later to how we do that, how we make macro-prudential analysis and regulation a reality.
But it’s essential to recognise that however much we improve our ability to see bumps in the road ahead, that ability will remain highly imperfect. So the most fundamental change is to create a financial system with more shock absorbers: and the shock absorbers of the banking system are capital and liquidity.
We need to run the banking system of the future with higher capital ratios, higher capital quality capital, and more loss absorbing equity. And the capital regimes which have been introduced in the course of the crisis – the UK’s Core Tier One 4% ratio and the US’ 4% Tier 1 Commons Capital - already require considerably higher capital levels then set out in past global agreements.
We also need to make capital to a degree countercyclical – with capital buffers built up in good times to be drawn down in bad times – and we need that approach to be reflected in some way in published accounts, with provision or reserve movements which reflect future possible losses. The Basel Committee is now working on the possible details of a countercyclical regime, and the International Accounting Standards Board (IASB) is committed to considering expected loss approaches to provisioning.
Fundamental issue: more capital, but how much more?
And next year the Basel Committee will turn to the more fundamental issue of what the overall level of capital should be. We need to be very careful of the transition path to any higher capital ratio regime. But we also need to address the issue of what bank capital should be in a far more fundamental fashion than we have in the past. What is striking, looking at the debates over the Basel II capital regime, is how much intellectual energy was devoted to producing a system which was more sophisticated in its definition of relative capital requirements against different classes of assets, and how little to the fundamental issue – what is the overall optimal level of bank capital ratios? Indeed, insofar as the overall level was considered, the implicit assumption was that the economy would be best served if sophisticated risk analysis resulted in a reduction in capital ratios, a greater ‘efficiency’ in the use of capital.
But for reasons which The Turner Review noted, and which were also noted last week in the Bank of England’s Financial Stability Review – both drawing on the insights of Modigliani and Miller – it is unclear whether significantly higher capital ratios do impose a long-term macroeconomic cost, even if they clearly have firm-level consequences, and even if any transition to significantly higher ratios would have to be gradually introduced to avoid harmful procyclical effects. We need to get on with immediate improvements to the capital adequacy regime, but also go back to fundamentals to design the best possible long-term system.
A similar balance between immediate action and long-term thinking is required in relation to the capital held against trading books, the area where the existing regime is most clearly and dramatically inadequate, but where the Basel II reforms left the VAR-based approaches, developed in the mid -1990s, almost entirely unchanged. Those VAR approaches are based on over-simplistic maths, they are procyclical, they fail to consider tail events or cross-system risks, and they allowed the explosion of balance sheets and of proprietary risk-taking by banks and shadow banks which played a major role in the origins of the crisis.
Capital requirements against trading books need to be significantly increased, and the already agreed Basel Committee changes, to be implemented by end 2010, will themselves produce a very significant change – increases of several times. But beyond those immediate fixes, as with the overall capital level, we need to go back to basics – looking at the different risk characteristics of different elements of the trading book, and thinking through appropriate approaches from first principles. Input from the industry to that long-term debate will be vital.
These changes in capital regime must be matched by major changes in the approach to the liquidity, another area where regulators across the world took their eye off the ball, amid all the complex debates over the Basel II banking book capital reform. The issue of how much this crisis was one of solvency or of liquidity will probably provide material for academic papers for many years to come. But it is certainly the case that the changed nature and scale of liquidity risks, changed patterns of maturity transformation, played a crucial role, and that the regulators failed to see the importance of the changes, and failed to develop either supervisory approaches or new rules to offset them. There was too much reliance on liquidity through marketability, including in off balance sheet vehicles –long-term contractual assets financed by a short-term debt. There was too much reliance on wholesale interbank funding, including in the UK case funding from abroad. In future we need larger buffers of undoubtedly liquid assets, primarily government bonds; and we need tighter controls of overall maturity mismatches. The FSA has already introduced major changes, and the Basel Committee is now working to agree new international approaches.
So we know many of the features of the regulatory regime required – alongside more intensive supervision – to create a more stable financial system for the future. And much of what was set out in The Turner Review has met with agreement from the industry, and from our international counterparts, who had reached similar conclusions when they looked at the causes of the crisis.
But I would also like to highlight three closely inter-related issues, where either the FSA’s own thinking has already progressed from where we were four months ago, or where there are still unanswered questions, or where there has been a debate about whether The Turner Review was radical enough.
Three issues for further consideration
These are the interconnected issues of ‘too big’ or ‘too interconnected to fail’, ‘too big and too cross-border to save’, and ‘too involved in proprietary trading to be a safe home for retail deposits’ – the narrow banking versus investment banking debate. Each of these issues relates to the desirable long-term structure of the global banking industry; and they are issues requiring careful and open minded debate, if we are to identify reforms which are adequately radical but also practical and able to command international support.
Too-big-to-fail
Policy instruments specifically designed to address the too-big-to-fail issue were not explicitly discussed in The Turner Review but are clearly important. If a bank is too-big-to-fail we face both the danger of moral hazard – risky behaviour implicitly underpinned by a put option on to the state – and an increase in the costs of rescue if there is failure. Three policy options are therefore discussed.
The first is resolution arrangements defined in advance which would make it possible to impose haircuts on at least some of the non-insured creditors of a large bank in failure. And there are certainly attractions in warning the non-insured creditors of even the largest banks that there is no certainty of bail-out in failure; and if a very large bank did fail idiosyncratically – i.e. failed when the rest of the system was stable – then such haircuts might in reality be applied. But if it is highly likely that the circumstances in which a very large bank gets into trouble are ones of systemic fragility, then it remains probable that the priority in large bank rescue will be to preserve systems’ stability, which is likely to mean keeping creditors whole.
A second option is simply to make banks smaller, to break them up, and that option should not be excluded from debate. But we might have to make banks very much smaller before we could really accept failure with equanimity. And we must not iconise small banks systems – the 1929-1933 bank failure wave in the US was one of multiple small banks falling like dominos. Finally it is unclear that absolute limits on bank size can be practically agreed at a European or global level.
The third option, and perhaps the best, is therefore simply to demand that larger banks have higher capital requirements, so as to reduce to extremely low levels the probability that they will ever fail; and to focus in particular on high levels of equity capital, since equity capital can be allowed to suffer loss without systemic danger, has indeed suffered losses in the present crisis, and would do so in any future resolution procedure. High equity capital levels are, I think, an answer to the moral hazard problem which also recognises systemic realities. Proposals put forward by US Treasury Secretary Tim Geithner include the possibility of higher capital requirements for what are labeled ‘Tier 1 financial holding companies’. The Basel Committee agenda, strongly supported by the FSA, now includes discussion of a potential capital surcharge for systemically important banks – where systemically important might be defined simply by size, but might also include considerations of interconnectedness.
Too big and too cross-border to save
The second closely related issue is that of cross-border banks which are large relative to their home countries. Crisis coordination is complicated by their international nature: the benefits of rescue are global but the costs are borne by the home country; and a small country may simply be unable to afford rescue – the Icelandic case. Therefore there has been much focus on measures such as total bank liabilities to GDP, on which the UK scores quite high, though with some other countries still higher.
What are we to do to address this concern?
We can and certainly should intensify global supervisory cooperation as much as possible through the development of effective colleges of supervisors; but we must also be realistic about what any amount of intelligent cooperation can achieve. The more important response to the problem lies again I suspect in capital and liquidity requirements, but in this case looking not just at the group level but at the capital and liquidity residing in national entity balance sheets.
Measures of total bank liabilities as a percent of home country GDP can highlight the issue at the most general level, but they also gloss over an extremely important distinction between the liabilities of a bank’s overseas branches unmatched by ring-fenced assets (the Landsbanki case in the UK) and the position of those banks whose foreign operations are fully capitalised subsidiaries, with host supervisors looking not to the group and to the home country supervisor for assurances of sustainability but primarily to the local entity’s prudential standards. One possible way forward therefore is that across the world we will see an increasing focus on local legal entities, making large global banks essentially holding companies of stand-alone national banks, and perhaps making possible overt agreement that in conditions of failure there is no one country responsible for rescue but rather different nations responsible for rescue of the specific legal entities.
Such a system would tend to mean that large cross-border banks would have to hold even more capital than a capital surcharge regime would require from a too-big-to-fail but purely national bank. But if there are additional systemic risks arising from their cross-border operation that may be appropriate.
I know that that proposal creates concerns – which have been expressed by many in the banking industry – that such ring-fencing would drive de-globalisation, reducing the ease with which global capital flows to its most productive uses. And if that were the case it would be a clear disadvantage. But as with the issue of total optimal capital across the banking system which I mentioned earlier, I suspect this is an issue where it may be important to distinguish cost to individual banks from costs to the overall macro-economy. It may be that economically useful global capital flows are entirely compatible with a more ring-fenced approach to bank capital and liquidity, and some emerging markets financial authorities may prefer a more ring-fenced approach because they believe it makes them less vulnerable to a sudden withdrawal of cross-border bank finance of the sort we have seen over the last year. There are extremely complex issues here to which at present we do not have certain answers. But the question is clear: it is not whether measures to reduce the risks arising from cross-border operation will create hassle and costs for individual banks; it probably will, but those costs may simply have to be accepted. Instead the question has to be how the regulation of cross-border banks best contributes to global economic growth and to global financial stability.
Narrow banking and investment banking: the Glass Steagall debate
The third complex issue is the appropriate relationship between retail and commercial banking and investment banking activity, and in particular risky proprietary trading. It is clear that there is a problem which has to be addressed.
In the years running up to the crisis, we had large commercial banks taking the benefits of retail deposit insurance and perceived too-big-to-fail status and using these to support risky proprietary trading activities which created large bonuses for individual bankers but large costs to taxpayers and financial instability which has produced a recession. That is not acceptable: the question is not whether we need significant change but how to achieve it.
One way would be to enforce a legal separation between narrow banking activities and investment banking activities, re-imposing, or in some countries imposing for the first time, Glass Steagall type distinctions. And some legally enforced distinctions of economic functions are clearly possible – indeed we already have one in the UK, with building societies not allowed to participate in the full range of financial activities which banks can perform – certainly excluded from exotic investment banking activities and subject to limitations on the percentage of their balance sheet which can be invested in for instance commercial real estate. Having such a tier of clearly narrow institutions does make sense; and indeed in my report to the Chancellor on the Dunfermline Building Society, I raised the issue of whether perhaps the freedoms to perform functions beyond residential mortgage lending had been set too loose after the various deregulations of the 1980s and 1990s.
But the real issue is not what the existing very narrow institutions should be allowed to do, but what should be the freedoms for those large commercial banks which are involved in the provision of services not only to residential customers and SMEs, but also to large complex corporates operating in the global economy and therefore involved in the management of complex foreign exchange, interest and credit risk. Can we keep these banks out of the trading activities which played a role in the crisis by writing a law which defines what they can and cannot do?
I suggested in The Turner Review that this was difficult. The key point to recognise is that the activities which caused the crisis were not ones which had been previously defined, under for instance Glass Steagall, as clearly outside commercial banking – activities such as equity underwriting and distribution – but activities which seemed close to the core functions of commercial banks such as credit intermediation, liquidity provision and interest rate risk management. Much of what went wrong went wrong in activities which a commercial bank was free to perform even before Glass Steagall was dismantled. It is, I think, difficult to imagine applying a law which says that a commercial bank cannot hold fixed income securities in its Treasury portfolio, turn loans into securities for distribution but hold them until distribution is achieved, or use credit derivatives to manage credit risks. And you certainly cannot say that a commercial bank cannot take any proprietary positions, without making it impossible to perform necessary market-making functions in, for instance, foreign exchange and interest rate markets.
But once you have said that a commercial bank can do all of those functions, you have allowed it to do most of the activities which, pursued on a large scale and in a risky fashion, caused the crisis.
That is why my tentative conclusion in The Turner Review was that we could not proceed by a binary legal distinction – banks can do this but not that – but had to focus on the scale of position-taking and the capital held against position-taking. That is why the increases in trading book capital to which I referred earlier are so important. And such increases need to be applied to all trading activity by banks or non-banks, since even where those trading activities are performed by institutions which are not insured deposit-takers, large systemic risks can still result. That was the lesson of Bear Stearns and Lehman Brothers.
Where there may be a role for legal entity definitions, however, is in defining more clearly the separate legal entities in which core retail banking functions and investment banking type functions are performed, ensuring that the retail banking functions are adequately and independently capitalised, and making it clear to the market that in any future crisis there is at least the possibility that rescue might apply only to retail banking operations. Such ideas have been floated, for instance, by Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank. They would not be straightforward to implement, but they deserve careful consideration.
The three interconnected issues just discussed are therefore vital ones. Their resolution will form a key input to the design of the new capital and liquidity rules which are needed at a national, European and global level.
Macro-prudential analysis and tools
But alongside these changes in static, regulatory rules – changes which will improve the shock absorbing capabilities of the financial system – we also need to improve our ability to identify system-wide risks, and equip ourselves with tools which can help offset emerging macro- prudential concerns. A macro-prudential approach is therefore essential.
That has now been said so many times that it is becoming a cliché. But I think this is one cliché that is important. A truism which is also true.
In the years running up to the crisis – in, say, 2002 to 2007 – we needed an analytical approach would put together the dots of the macro-prudential picture. In the UK that picture was of a growing current- account deficit, rapid credit growth, rapidly rising house and commercial real estate prices, the rapid growth of securitised mortgages, rapidly growing banks dependent on wholesale funding, and extensive reliance on funding from abroad, both via interbank funding and via US purchases of securitised mortgages, a reliance on funding from abroad which in turn, of course, was the flip side of the current-account deficit. We needed to do that analysis, identify the emerging risks, and then take offsetting actions. But we had in place neither the analytical approach nor the regulatory tools. We need to put them in place for the future.
If the overall principle is clear, however, much work is still needed to define how precisely macro-prudential regulation will operate. There are important questions in respect to objectives, to tools, and to the choice between hardwired and discretionary approaches.
- On objectives, a crucial issue is how ambitious we should be. Are we simply aiming to increase the resilience of the financial system, reducing the likelihood of bank failure? Or do we believe we can reduce the amplitude of economic cycles, more effectively leaning against the wind of asset price bubbles, using other instruments than the interest rate to take away the punch bowl before the party gets out of hand? The more the objective is the latter, the closer the required links to the conduct of monetary policy.
- On tools, one clear priority is a countercyclical approach to capital at the institutional level. But it is also possible to envisage both the definition and then the through-the-cycle-variation of margin requirements in secured lending, and of loan to value (LTV) or loan-to-income (LTI) ratios in, for instance, residential mortgages. Such approaches are essentially ways of regulating leverage at the product specific rather than the institution specific level. But establishing and then varying maximum LTV or LTI ratios in mortgages, raises complex issues relating to consumer access, and overlaps with conduct of business concerns. The FSA will make a contribution to that debate in the Discussion Paper on the mortgage market, which we will issue in October.
- Finally, there is the issue of whether macro-prudential tools, and in particular countercyclical capital adequacy, should be varied in a discretionary fashion or hardwired, through, for instance, a Spanish dynamic provisioning type approach. The issue of hardwired countercyclical rules is already being considered by the Basel Committee, and the conclusions they reach on that issue may in turn have implications for the balance between hardwired and discretionary elements within the UK approach.
As Mervyn King has stressed in several speeches, we therefore need to recognise that there is much work to be to be done to put flesh on the bones of the commitment in principle to a macro-prudential approach.
We also of course need to work out which institutions or committees play what role in macro-prudential analysis and decision-making. And as I say that I see various journalists in the room perking up a bit. At last, I see them thinking, no more of these issues of principle and substance, boringly agreed by most people, but the really fun bit of the speech – the latest twist in the FSA/Bank/Treasury, Adair/Mervyn/Alistair soap opera. I read accounts of this soap with interest but with little recognition, and I also read of concerns that a focus on future arrangements might distract us from the substance of what we need to do to fix the system. So, let me assure you, the vast majority of all our efforts is focused - and will continue to be focused - on the actions we need to take now and the changes in regulation we need to make for the future.
But clearly at some time we will need to think through how the new activity of macro-prudential analysis and regulation would work effectively if we assume that the existing institutional responsibilities remain unchanged; and it is important to have a rational a debate as possible about any alternative arrangements proposed. That debate needs to focus on what will work best, not on any considerations of institutional ambition or defensiveness. Five considerations are relevant to the debate.
- First, it is clear that there needs to be a very close relationship between central banking activities and the regulation and supervision of banks, and that the importance of that relationship increases if we believe that macro-prudential analysis and action has an important role to play. In the years running up to the crisis, there was an insufficiently close relationship. The two institutions were so keen each to concentrate on their own specific responsibility – the Bank on monetary policy defined around the inflation rate objective, the FSA on the supervision of institutions on an individual case-by-case basis – that, as Paul Tucker has expressed it, we left an underlap between us.
- Second, the need for that close relationship is an argument in favour of locating the supervision of banks within the central bank, and that is clearly a feasible way of proceeding, since several other countries in the world do it.
- Third, however, it is clearly not essential to do it in order to ensure effectiveness. Spain is perceived to be an effective regulator of commercial banks with bank supervision located within the Banco de España. Canada is perceived to have done well with the Office of the Superintendent of Financial Institutions separate from, but working in close liaison with, the Bank of Canada.
- Fourth, any change we make in structural responsibilities will have some advantages – some important interfaces will work much better – and will create new disadvantages, new dangers of different problems falling between the stools. Separating bank supervision from insurance supervision creates the danger that an institution like AIG can inhabit a regulatory no man’s land. Separating conduct supervision from prudential supervision can also reduce the effectiveness with which issues are addressed: the problems of subprime lending in the US and in the UK simultaneously raise issues about financial stability and about consumer protection.
- Fifth and finally therefore, however we set up the different roles, the crucial requirement is to identify the dangers of that particular division of responsibility and to deliberately design mechanisms to guard against those specific dangers. We have not been fully effective in the past in achieving close working relationships across institutional divides. In future, alongside more intense supervision, and more effective regulation, we need a commitment to build deeper working relationships between whatever are the different institutions involved in the full spectrum of activities from macro-prudential regulation through to consumer protection.
Finally, if we the financial authorities need to make very important changes, so undoubtedly does the banking industry.
The banking industry performs vital functions in the real economy; households and businesses large and small depend crucially on its effectiveness and its soundness.
And much of the banking industry and many, many bank employees were always – before the crisis and throughout the crisis - dedicated to the provision of high quality service to customers.
But in the years running up to the crisis, too much of the talent of the banking industry was devoted to developing ever more complex financial innovations, which were often based on regulation and tax arbitrage, and which did not deliver useful social value. Instead, they created financial instability while making many individual bankers rich. As a result, the term ‘banker’ is not one which presently commands much public respect: the banking industry has a job to do in rebuilding that respect.
The new, more intensive approach to supervision and the new regulations which we can and will impose, can guard to a significant extent against the dangers of financial instability. But it is up to the banking industry itself to restore an appreciation of the positive role which banking can and must play and to create a culture focused on delivering necessary services to customers. Winston Churchill once said that he wished we might see ‘finance less proud and industry more content’. What we certainly need to see is a financial industry which is proud only when it is making its customers more content by serving the real needs of the real economy.