Page last updated at 19:53 GMT, Thursday, 12 March 2009

'Be afraid' warns regulator Sants

Hector Sants
The FSA will be intrusive and direct, Mr Sants has warned

The financial services industry should now be frightened of the City regulator, the boss of the Financial Services Authority (FSA) has said.

FSA chief executive Hector Sants warned its new regulatory regime would be more intrusive and direct than before.

It will include rules governing how much cash banks must hold in reserve.

The Chancellor Alistair Darling later underlined the importance of this, and called for "backstop" powers to stop banks overstretching themselves.

"Banks took on too much risk," he told Channel 4 News. "RBS, for example, buying the Dutch bank ABN - they took on too much risk."

Regulators should have a "backstop" power, he said - in effect, a regulation that could be applied to all banks to limit their lending.

"Making sure that [banks] have got adequate capital against times when things are tough, I think that is very, very important," he added.

Earlier, Mr Sants's comments came in a speech on the lessons of the banking crisis.

He said society was now demanding aggressive intervention, to stop firms such as banks taking risks that could bring down the financial system.

"There is a view that people are not frightened of the FSA," said Sants.

"I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA," he added.

Failure

The chief City regulator has been widely criticised for its failure to supervise banks in the UK closely enough, to stop them building up the huge liabilities, in the years preceding 2007, that led to the credit crunch.

We couldn't compete with these lunatics who were throwing money at the market: 125% mortgages; self-assessment; it was madness
Sir Nigel Rudd, deputy chairman, Barclays bank

Last month, the new chairman of the FSA, Lord Turner, admitted that the FSA had not done its job properly and had not focused on the "excessive risks" the banks had been taking.

"The FSA at that time was more focused on the processes, the structures, the reporting lines, rather than simply saying 'when I look at this whole business model... it's all too risky'," he told the BBC.

The FSA will soon publish a full-scale plan to change the way the financial services industry is regulated, with new rules governing the pay of bankers.

It is now widely acknowledged that excessive bonuses contributed to banks and their staff taking excessive risks.

Intensive supervision

Speaking to an audience in London, Mr Sants said that to stop a "similar crisis" in banking happening again, the supervision of banks would have to become more "intensive".

He said the FSA would take action if it thought the judgements of senior managers in financial institutions were too risky, even if it carried the risk of stifling innovation.

"This is a fundamental change," he said.

"The revealed preference of society says that this is, and possibly always will be, what society as a whole expects regulators to be doing.

"Indeed, it was what they thought we were doing," he added.

Madness

Support for this new, tougher, approach came from Sir Nigel Rudd, deputy chairman of Barclays bank.

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Sir Nigel Rudd, deputy chairman of Barclays Bank, attacks the UK bank 'madness' that led to the recession.

Speaking on the BBC's Working Lunch programme, he said that some banks and former building societies which had specialised in mortgage lending had over-expanded in a form of collective "madness".

"The banks in the UK... that got into trouble, either made terrible corporate decisions as RBS did, or actually were acquirers of building societies," he said.

"Those are the banks that got into trouble, because they had a huge deposit base, and they leveraged that to a ridiculous extent, and Lloyds on its own and Barclays actually didn't do that.

"We couldn't compete with these lunatics who were throwing money at the market: 125% mortgages; self-assessment; it was madness," he added.

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