Banks 'in danger of forgetting crisis lessons'

The head of the City's financial watchdog warned today that banks were already in danger of forgetting the lessons of the financial crisis.

Lord Turner, chairman of the Financial Services Authority (FSA) told MPs on the Treasury Select Committee he was worried about a lack of will to drive through reform as memories of the turmoil fade.

The chairman - speaking a day after news of a £9.6 million pay and shares package for the chief executive of part-nationalised Royal Bank of Scotland emerged - added there was "very aggressive hiring going on" in the trading activities of investment banks.

He said: "I think it is actually incredibly important for us to realise the enormous intensity of the crisis that we have just been through.

"I think there is a worry that because we are now seeing some positive signs and because of the exhaustion level of driving through the changes we require that there could be some drawing back from the degree of radicalism we require."

He also called for an effective "tax on size" to prevent banks from growing too big.

Lord Turner said higher capital requirements for larger banks would reduce the risks of failure.

"I think it is (an idea) that we need to think about and think about at a global level," Lord Turner said.

Last week Bank of England Governor Mervyn King warned of tough choices ahead over the size of the banking sector - saying that if some banks were too big to fail "they are too big".

The FSA chairman said he preferred a "sliding scale" of capital requirements for banks depending on their size.

"I have some doubts as to whether we we would be able to get them small enough that they could fail without systemic concerns," he said.

Lord Turner said banks were now being subjected to much more intense supervision by the regulator following the crisis.

The FSA's bolstered supervision team was now doing "fundamentally different" things, he added.

"(We are) using stress testing in a far more intense fashion than we were previously. It is a very major change in the intensity of supervision."

Lord Turner also called for a Financial Stability Committee chaired by the Bank of England Governor or Deputy Governor, which would take decisions on financial stability in a similar fashion to the interest rate-setting Monetary Policy Committee.

There "very clearly needs to be close co-ordination" between the regulator and central banks and a joint committee would prevent "wasteful competition" between the two organisations, he said.