Adair Turner is a very dangerous man
The head of the Financial Services Authority is certainly a brilliant man. His speeches on the causes of the financial crisis are models of intellectual clarity. His phrase-making is lethal (he came up with “socially useless” to describe much of the banks’ trading activities). And just like the Bank of England governor, Mervyn King, Turner sees directly through the spurious lobbying of the sector.
The trouble is that Adair Turner thinks he is brilliant enough to tame the financial sector on his own by utilising the power of his intellect. Worse, he might even be right.
Turner has long argued that the way to make the financial sector safe and to prevent a repeat of the 2008 banking meltdown is active regulation.
And he understands that the banks will be constantly trying to find ways of evading that regulation.
He told the Today programme this morning:
“Whatever the set of regulations we set, the financial industry will devote a lot of energy to finding ways round it…That’s what happened in the past. New risks developed that we didn’t spot.”
Turner’s solution is to be smarter than those arbitraging bankers.
“In the future we’ve got to continually look at the changing nature of the financial system and if we see things developing in what people call the shadow banking system then we’ve got to be able to extend the range of regulations to cover those risks as well. It will be a continual process.”
It is a battle of wits that the brilliant Turner might be able to win. Terrific.
But what happens when Turner retires? Will his successor be as sharp as him in recognising when bankers are hiding risk in a systemically dangerous fashion? Will his replacement be as immune as Turner to the powerful lobbying of the sector? I think the answer is highly unlikely to be yes. Remember that Turner’s predecessors at the FSA never said boo to a banker.
It’s not all bad news. Turner used to be opposed to breaking up the banks in order to tackle the problem of institutions being “too big to fail”. Now he’s coming around to the idea, as his speech this week shows. But he’s still resistant to the underlying principle of structural reform, namely to create a credible threat that a bank will fail if its managements take irresponsible risks.
Turner also told Today this morning:
“We have to make sure that the probability of the failure of a large bank is very, very small.”
But where is the market discipline if regulation has supposedly minimised the risk of failure to negligible levels? Think of the incentives in such a scenario. If bank managements are told by the regulator that they are so well regulated that they will not go bust, they have a green light to go nuts on the lending front, hiding risk all over the place. And when it all goes wrong, they can blame the regulator for lulling them into a false sense of security. The only way you are going to get bankers to behave is if they feel that there is no state backstop if they get into trouble.
I think Turner’s right that breaking up the banks is not a panacea. I’m not a John Kay-style purist on these matters. There would still need to be regulation of banks, even if they were made small enough to fail. But the priority should be to cut the big beasts down to size.
I think Turner has it the wrong way round on the reform front. Tougher regulation will help tame the banks, but the heavy lifting needs to be done by greater market discipline. Structural reform is not a panacea, but tighter regulation sure as hell isn’t either.
It is said that the American system of government is so good because it was designed by geniuses to be run by idiots. Turner risks creating a system of regulation that can only be run by geniuses like him. Hence the danger.Tagged in: Adair Turner, banks, Financial Services Authority, John Kay, socially useless, too big to fail
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