Exclusive online responses from Tim Congdon, George Magnus, Oliver Kamm and Robert Kuttner
The Prospect interview panel
John Gieve is chairman of financial transaction specialists VocaLink and formerly deputy governor of the Bank of England
Jonathan Ford is commentary editor of Reuters and an associate editor of Prospect
Gillian Tett is an assistant editor of the Financial Times, specialising in global financial markets
Paul Woolley is a senior fellow at LSE, where he founded a centre for the study of capital markets
Jonathan Ford What stage have we got to in the crisis?
Adair Turner I think we are well-advanced in the evolution of the financial aspect of the crisis—the extreme public policy interventions which followed the crisis last October have stabilised the system. We do now have banks which have adequate capital. I think there are still some issues across the world as to whether we have full transparency. But most countries have made sure their banks are capitalised to deal with the future. So I think we are beyond the point of fragility.
Economically, we are at some sort of turning point, in the sense that the period of extreme GDP fall has occurred. We are seeing increases of GDP in some parts of the world, like China and much of Asia, and in the developed countries we are probably on the turn. But what we don’t know is how rapid that process of economic recovery will be and whether it will be constrained by either a very cautious banking system or by the scale of public sector debt overhanging many of the big economies. But the more fundamental thing, especially for regulators like me, is to realise that what has occurred has imposed huge economic harm throughout the world and so we really do have to work out how to stop it happening again in five or ten years’ time. And that requires a very major reconstruct of the global financial regulatory system, and I don’t mean a minor adjustment.
Ford George Osborne, the shadow chancellor, has put forward proposals that would transform the tripartite regulatory regime in Britain, effectively abolishing the FSA, moving its banking supervisory functions back into the Bank of England and creating a new consumer protection body. Do you think that’s a sensible move?
Turner The institutional architecture is the least important issue here. If you look around the world, some countries combine the prudential supervision of banks with the central bank and some have it separate. And of those countries that are thought to have done well in this crisis, some of them do it one way and some do it the other. Everyone says Spain has done reasonably well and it has supervision of banks allied to its central bank. Yet Canada, a country which appears to have had a very sound banking system throughout the crisis, has a separation between the central bank and bank supervision. So there is a spectrum of activities, from the monetary policies of central banks through macro-prudential analysis, micro-prudential supervision and customer protection issues, and wherever you divide it up, you will create interface problems and you will have to manage them.
Of course the argument for a close relationship between central banking and prudential supervision of banks has been sharpened by the fact that we’ve realised that macro-prudential analysis—seeing the overall picture and pulling big counter-cyclical levers—is vitally important. I believe that the closeness of links required could be achieved by intelligent working relationships across the existing institutional divide. The Conservatives have convinced themselves that those links need to be so tight that you have to switch around the boxes, and you can argue this either way. But it is much less important than the substance of what we do.
John Gieve How risky will a transition be?
Turner You can’t do a split like that without some risks of transition management—and I don’t think George Osborne would deny that. But that’s a challenge to be dealt with if the electorate decides to go in that direction..
Ford John Gieve, you used to sit on the other side of this fence at the Bank of England. Do you think the Bank would welcome a re-absorption of these activities?
Gieve I don’t think I would have done it. I think it’s possible to address the defects without having that wholesale change. The Conservative decision to reintegrate banking supervision with the central bank not only creates a transition problem, starting now by the way, there’s also the risk that if you put all the responsibilities in one place you increase the risk of groupthink, and central banks aren’t always noted for their openness and transparency.
Ford Are there ways in which the existing system could be improved?
Turner The way that the tripartite system worked post 1997, and especially the relationship between the Bank of England and the FSA reflected a particular philosophy of the time, and in retrospect, I think everyone recognises that a different approach would have been better. The bank was focused on its monetary policy mandate. The FSA focused on micro-prudential supervision on an institution by institution basis, and on an interpretation of that which was fairly legalistic and focused on systems and processes. Somewhere between the big picture got lost; the overall trends in credit extension across the economy and in assets prices were not put together with certain business developments to sound a warning. To be more concrete: back in 2005, there was not a process between the bank and the FSA of saying look we have a large current account balance of payments deficit requiring the inflow of capital, rapid credit growth, rapid growth of securitised lending to mortgage markets, rapid development of some go-getting mortgage banks—HBOS, Alliance & Leicester, Northern Rock and so on—which were heavily reliant on both the ability to sell mortgage securities through to US mutual funds and the ability to borrow money wholesale in the inter-bank market… there was a failure to put all of that together and say, “faced with this, we want to be imposing levers on the liquidity or the capital policy of HBOS or Northern Rock.” There wasn’t the philosophy that this was really part of either institution’s job. There was no definition of the levers to pull if you decided there were problems—no concept of counter-cyclical capital and so on.
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sincerely hope this debate does not fizzle out.it is imperative that the true nature catastrophic damage of ‘laisser faire’ are kept to the forefront of the current debate ,which risks being smothered by tthose who have successfully tried to frightenus with the loss to business for london.In fact the presumed loss is but a tiny fraction of what unbridled lasser faire has cost the nation and the world
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