Watchdog slams 'giant failure' that led to banking crisis

Tough new sanctions needed on directors of banks that fail, Lord Turner tells MPs

Britain's chief financial watchdog last night accused the financial establishment of a "giant intellectual failure" in the run-up to the financial crisis and called for tough new sanctions on the directors of banks that fail.

Lord Turner, the outgoing chairman of the Financial Services Authority, told the Parliamentary Commission on Banking Standards: "Banks are different in nature from retailers or manufacturers or hoteliers, they have the ability to make a mess of the economy rather than simply make a mess of their own businesses."

Lord Turner said bank directors as a result could not simply consider their role as being to maximise returns for shareholders as a result, and added: "There have to be sanctions which are different for bankers than the normal set of rules that apply to other sectors of the economy.

"People have often said in other sectors that Britain is too unwilling to accept serial bankrupts. That is fine for, say, innovative high-tech businesses. In relation to bankers, that is a disaster."

Lord Turner earlier warned: "In the world of those responsible for the financial system and risk management, there developed a theory (over the last 30 years) which was based upon the benefit of having efficient markets and the benefits of innovations and competing markets which was wrong. It was dangerous and a form of intellectual arrogance."

He said that Britain needed to become "reasonably safe against the re-emergence" of the "delusion" which took hold of banking in the run-up to the financial crisis that the system was made safe by these factors.

He said: "The question is how to we design it for 25 years' time when we have another. This time it's different, this time we're cleverer."

Lord Turner also warned that the network of interlinked derivatives traded between banks could yet spark another crisis: "I question whether we have been radical enough in questioning the 30-year explosion in interconnectedness and its potential for creating risks that we don't yet understand."

Andrew Bailey, who is head of prudential supervision at the FSA, said earlier that he feared giving watchdogs the power to force a break-up of banks which seek to break a proposed "ring-fence" that will protect depositors and small businesses could be effectively worthless. He feared regulators may be cowed by the big banks' lobbying power, particularly with politicians.

He added: "This is an industry that is habitually innovative and habitually will try and tunnel under the ring fence. A deterrent power has a lot of merit [but] it is a little bit like nuclear warfare, it has to have meaning.

"You have to create a structure where a power can be used if it is appropriate. It's a reality that I observe in this business, there is a very strong lobbying force, lobbying of politicians, lobbying of us."

The Commission, which will have a key role in shaping the Banking Bill, has repeatedly questioned witnesses on whether such a power would be effective in preventing banks from attempting to break through or "game" the ring-fence.