Sir Martin Sorrell: Co-operation is key in putting the banks to rights

Without reform... the problem of some banks being 'too big to fail' is still with us

One of the less-discussed features of the financial crisis has been the collateral damage it has inflicted on the confidence of companies large and small.

As a corporate user of wholesale banks, WPP has suffered like others from reduced liquidity in financial markets. We worry that continuing instability threatens to choke off investment and delay economic recovery. And as the crisis drags on, we worry that the steps taken so far to address it have been inadequate.

The response of European and other authorities around the world has been poor. What the crisis exposed is not so much insufficient regulation as a catastrophic failure of supervision at multiple levels.

It is now clear that the authorities did not fully understand the consequences of the repeal of the Glass-Steagall Act in the US and of the Big Bang changes to financial markets in the UK. They failed to give sufficient consideration to the dangers in combining financial market trading activity with commercial and retail banking. These are fundamentally different activities requiring different management skills and a different approach to official supervision.

Supervisors need to have a much broader ability to conduct prudential checks on individual banking groups. Central banks should have a clearer view of the big picture – of institutions' total exposure to sectors and markets – and therefore be in a better position to provide guidance when an individual bank has potentially troublesome exposure. Such a singular focus on supervision would have highlighted much sooner the dangerous exposure of banks to the "shadow banking system", for example – and permitted the authorities to take avoiding action.

In the US and Europe there is a common desire to reduce the risks. The problem is that different countries are trying to do this in different ways: in the US through efforts to impose the Volcker Rule that seeks to ban banks from proprietary trading; in the UK by ring-fencing a bank's retail activities from investment banking.

In a world of large, diversified, global financial institutions, no country can act in isolation; international co-operation is mandatory. But despite the ambitious promises made by the Group of 20 leaders in 2008, we have seen the semblance of international co-operation more than the reality.

The US has been ploughing its own political furrow. EU leaders have been caught between the conflicting desires to shore up the euro, restore financial discipline and protect their domestic banks. Asian countries have scarcely joined in the regulatory drive, creating the risk of regulatory arbitrage.

It is not therefore surprising that markets are unsettled. To regenerate confidence in the system, governments should give more autonomy to supranational institutions such as the Financial Stability Board, combined with a stronger brief to co-ordinate monetary stability with national central banks.

Without reform, we need to be clear that the problem of some banks being "too big to fail" is still with us. In a global marketplace, it is impossible to let major international banks fail without putting the very functionality of financial markets at risk.

Meanwhile, the various regulatory machines are in overdrive and will probably generate a surfeit of rules that will create more problems than they resolve. There is pressure, for example, to tighten regulation of the use and trading of derivatives. Such actions would be unwelcome if they impaired companies' ability to hedge their risks.

It was not, after all, non-financial corporations that caused the financial crisis. It will be hardly fair if they have to suffer from regulatory efforts that increase bureaucracy and cost.

The author is CEO of WPP plc. A longer version of this article appears in the book "Investing in Change", commissioned by the Association for Financial Markets in Europe (

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
A poster by Durham Constabulary
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine