UK’s FSA seduced by “boom years”

3 March 2010

The UK’s Financial Services Authority (FSA) was seduced by the “boom years” of the 20th century into believing that banks were too big to fail, the regulator’s chairman has said.

Lord Turner made the comments in reply to questions from the Treasury Committee.

The FSA’s chairman said: “Everyone was seduced by the long boom. We were often led astray in the past by complicated mathematical rules. Regulators failed to notice the inherent weakness in that position.”

However, he argued that the size of banks was also not the main reason behind the economic turmoil - smaller institutions could have been equally guilty of “over-exuberant lending” and “risky short-term wholesale deposits”.

Greater restrictions on liquidity and capital and the introduction of “counter cyclical macro-prudential tools” would have more impact on increasing the stability of the banking industry rather than breaking up the bigger banks, he advised.

Lord Turner also explained that the cost to the public of bailing out the financial services industry during the global financial crisis may well be relatively small.

“It is quite possible that the total overt costs of the UK’s big bank rescues may not exceed five-ten per cent of GDP, and perhaps considerably less as indeed was the case in the Swedish banking crisis of the 1990s.”

The FSA recently unveiled a new set of enforcement penalties which could see an organistion forfeiting up to 20 per cent of revenue for breaking its rules.

By Jim Ottewill

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