The Week
The Week, 20/03/09
Turn again, Lord Turner
Lord Turner has pronounced: there will be more financial regulation. Quite what, though, is unclear. Turner has found, as we all have, that there are more questions than answers.
Turner, chairman of the Financial Services Authority, is caught in a bind. He wants to avoid a repeat of the credit crunch without damaging London’s position as the leading world financial centre.
He rightly points out that it is better to have tighter regulation, even if that makes other, laxer, financial centres seem more attractive, because a collapse of the sort we have seen is far more damaging. London has so far trodden a sensible line of being tighter than the likes of Hong Kong but a little laxer than New York. That line now needs to shift.
However, Turner also recognises the need for tighter international regulation as we all shift our lines together. That will be difficult to achieve and will take time—a precious commodity as things stand. It also raises the spectre of a European regulator, which would not have the same interest in maintaining London’s pre-eminence that we have.
Turner does have some answers, and they are on the right track. We should regulate UK branches of overseas banks rather than leave them to their home regulator; banks should hold more capital in relation to the risks they take; hedge funds should be subject to some regulation.
However, it is clear that specific measures still need working out, perhaps because no-one is sure of the answers. It is significant that the expected measures to curb mortgage lending, such as capping mortgages at 95% of the house value and at three times the borrowers’ salary, have not emerged after all.
Perhaps Turner shied away from controls on mortgages because he feared provoking an uproar. It becomes increasingly and depressingly clear that the excesses of the recent past cannot be easily swept away. Restraint is for everyone else.
These purported restrictions would actually have been less severe than the norm imposed by building societies before the free-for-all: two-and-a-half times salary (or three times joint salaries for a couple) and 90% maximum.
Yet reasonable and sensible lending restrictions, which ultimately will be in the interests of everyone, were roundly condemned in advance. It was argued that such restrictions would hit the already battered housing market further.
Yet in the same breath critics argued that mortgage lenders are already restricting lending and in any case it is currently impossible to get a mortgage of more than 90%.
So if mortgages are already restricted, how are tougher regulations going to drive house prices lower?
Another argument is that there were no problems when lenders were routinely offering five times salary. The problem, according to this line of thought, is not that people were unable to pay the mortgage, it is unemployment that is preventing them from honouring their commitments.
For heaven’s sake. Of course there was no problem when house prices were going to rise for ever more and unemployment was condemned to history. It was all right to take a 120% mortgage if your house was going to rise in value by 30% in the next 12 months. The problem, as we have discovered, is coping when it all comes to a shuddering halt.
We need restrictions because we do not know what will happen tomorrow. There needs to be some leeway in case of misfortune somewhere over the next 25 years. Indeed, those who take fixed term mortgages and pay only the interest are staring at an infinite life to their mortgage as they are paying nothing off the sum borrowed.
House builders always argued that they preferred steadily rising house prices to an unsustainable boom. They were right, and the sooner we have a sensible mortgage lending regime restored the better.
One point on which I must take issue with Turner is his suggestion that whether the FSA or the Bank of England should regulate the banks is ‘the least important thing in this debate’. It is the most important thing.
The crux of the problem in the UK is that the FSA has singularly failed to curb the excesses. One can argue that the Bank of England would have done no better but although I doubt if its heavier hand would have avoided the crisis altogether it would probably have ameliorated it.
The FSA has shown itself lacking in leadership. It regulates after the event, imposing fines for indiscretions rather than setting out guidelines that can be adhered to. It has also drawn accusations that the banking professionals have run rings round its overstretched and underexperienced staff.
Turner’s failure to come up with any concrete proposals at this stage suggest that the FSA is still not ready to provide leadership.
It will be hard for Gordon Brown to shift responsibility back to the Bank of England, as he was the one who, as Chancellor of the Exchequer, gave more powers over the banking sector to the FSA. So it will almost certainly be down to Turner, his review over, to get down to the nitty gritty.
Let’s hope he can come up with a few answers.
Rodney Hobson
Author, Shares Made Simple and Small Companies, Big Profits