Sir Howard Davies: 'We've let bankers duck and weave'

He has been dodging political missiles as chair of the Airports Commission, but Sir Howard also has plans to reform finance

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The Independent Online

Sir Howard Davies is circling the runway. The deadline for public submissions to his Airports Commission closed this month and the final report will be published in the summer. After two-and-a-half years of wading through cost-benefit reports and absorbing mind-numbing quantities of technical detail the end is now in sight. “I know a lot more about baggage handling systems than anyone really needs to know,” laughs the 64-year-old.

We’re just a stone’s throw from St Paul’s Cathedral, sitting in the head office of Phoenix, the insurance firm Sir Howard chairs. The commission’s work has, he admits, been arduous. The political surface-to-air missiles have made life interesting too.

Boris Johnson took it badly last year when the commission ruled out recommending the construction of a new airport in the Thames Estuary, the so-called “Boris Island”.

The Mayor dismissed Sir Howard as “myopic” and said his report was destined to be “vertically filed” on a Whitehall shelf because no government will ever dare to expand Heathrow. Mr Johnson even said Sir Howard had privately let slip to him that London would still need an entirely new airport by 2020. Sir Howard vehemently denied saying any such thing.

That row was five months ago. But Sir Howard now sounds inclined to smooth things over. “If you’re Mayor of London why would you be against attracting a larger share of the infrastructure budget?” he asks. But wasn’t he put out by the Mayor’s apparent lack of respect for the commission’s independence? “We pay as much attention to his arguments as they deserve,” he says, a thin smile on his lips.

Sir Howard also thinks the Mayor is wrong to say no government will expand capacity at existing airports. “This is a kind of irresistible force meeting an immovable object. My bet’s on the irresistible force – which is demand,” he says. “The demand for aviation is going up and I can’t see any circumstances in which it isn’t going to continue going up. The issue is how much we accommodate and where do we accommodate it.”

But Sir Howard has been thinking more widely than Boris and baggage handling. This month he is publishing a punchy book on financial regulation. He has an interesting take on the subject, having been the first chair of the Financial Services Authority after it was established by Labour in 1997.

The performance of the FSA in the lead-up to the crisis has been examined in some detail. And the autopsies have been damning, with most concluding that the watchdog was asleep at the wheel, failing to recognise the risks that were building in the financial system. But Sir Howard has said relatively little on this.

Did things, I venture, start to go wrong under his watch? Sir Howard bridles at the suggestion, pointing out that banks did not start to run down their equity buffers until after he left the FSA in 2003.

What about the performance of the FSA in the crisis itself? Officials did not seem to communicate effectively with the Bank of England or the Treasury, the other two legs of the “tripartite” regulation system. On this Sir Howard is thoughtful, reflecting that although he had a good working relationship with the Bank, having previously been a deputy governor, his successors seem to have been more distant. “Maybe we relied on the personal connections and didn’t put in place institutional structures which would survive when people changed.”

Sir Howard thinks, rather unfashionably, that it was a mistake for the Coalition to abolish the FSA in 2010. He is also sceptical about the decision to hand general financial supervision back to the Bank of England. “If you look internationally, sometimes they do regulation in the central bank, sometimes they don’t. It’s not obvious that one model is better than another,” he says.

But Sir Howard’s central argument in the book is that financial regulation more generally has taken a wrong turn. He thinks it has become overly prescriptive, undermining the responsibility of board directors. “There is now a sense these banks are managed by the regulators, that regulators are approving their board members, are crawling all over them and have hundreds of staff living in there,” he says. “Are you trying to control the banks because you can’t trust them, or are you trying to create more market discipline?”

The lack of international co-ordination on regulation has also created a mess, ripe for arbitrage by crafty bankers. “I think a kind of simplification exercise is really going to be needed fairly soon. We’ve let a thousand flowers bloom here. This is a classic case where you’ve created a chance for people to duck and weave,” he says.

So what can be done? Sir Howard wants a legal regime for winding up failed banks, so the taxpayer will no longer have to rush to the rescue when institutions get into trouble. He also says the Financial Stability Board – an international oversight committee created by the G20 in 2009 – should be given powers to impose regulatory standards globally.

Yet in other ways Sir Howard is less radical. He says he is “comfortable” with the current level of capital that banks hold and argues that compelling them to have larger buffers would disrupt lending to the real economy. He sees no case for splitting universal banks. He even has doubts about the Coalition’s “ring fence” of retail and investment banking. All of that, combined with the call for a regulatory roll-back, makes Sir Howard the kind of man the banking lobby could probably do business with.

Might he even join them? He has been mentioned as the possible next chair of the Royal Bank of Scotland, to replace Sir Philip Hampton. He refuses to be drawn on the idea. “I have never in my life commented on jobs – either ones I’m going to do or ones I’m not going to do,” he says.

For now, as well as chairing Phoenix he teaches a course at Sciences Po in Paris for a couple of days each fortnight. But a gap in his diary will open up when the Airport Commission’s work is done.

Meanwhile, the airport lobbying’s not over yet. What does Sir Howard make of the propaganda war raging between Heathrow and Gatwick on the London Underground, with each trumpeting their case and denigrating the other’s. “I’m flattered at having three advertising campaigns all targeted at me!” he smiles. “I feel sorry that I don’t travel more on the Tube.”

'Can Financial Markets be Controlled?' is published by Polity on Friday