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
food + drink
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
UK Border Control
ebooksA special investigation by Andy McSmith
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

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn