UK banks need to get back to basics to cope with the threat of a "deeper and more prolonged" recession than expected, the City watchdog warned today.
The banking system is "vulnerable to further shocks", the Financial Services Authority (FSA) said in its latest financial risk outlook report.
It said: "To survive adverse conditions, banks need a strategic shift away from short-term profit maximisation towards ensuring medium-term survival and sustainable growth."
The FSA also fired a fresh broadside at the payment practices of an industry currently under the spotlight as banks bailed out with public cash prepare to pay bonuses to staff.
"Although it is hard to prove a direct causal link, there is widespread concern that remuneration policies may have been a contributory factor to the market crisis," the report said. "The policies used during the period leading up to the crisis, mainly but not exclusively in investment banking, tended to reward short-term revenue and profit targets."
While the impact of falling interest rates - slashed to a record low of 1 per cent last week - and Government spending packages remains unclear, "the recession may be deeper and more prolonged than expected", the FSA said.
Firms and consumers should "plan for a greater degree of uncertainty than normal" as predictions of a 2.2 per cent decline in UK output this year could prove "overly optimistic", it added.
Following the crisis in the financial sector, firms, regulators and the Government face an uphill struggle to restore consumer confidence, the watchdog said.
"Loss of confidence in financial markets can have a long-term effect on the willingness of consumers to engage with financial services.
"Over the longer term there is a risk that a loss of confidence and trust in financial services and poor experience of some products may make it harder to engage consumers," the report added.Reuse content