Ex-FSA chief calls for massive increase in banks’ capital reserves

'It could take at least a generation to create a credible body'

The former chairman of the City watchdog last night called for banks to massively increase their capital reserves on the day plans for a new professional standards setting body were unveiled.

In a speech in Frankfurt, Lord Turner, who chaired the Financial Services Authority until its abolition in 2013, backed the argument that, in an ideal world, bank-capital ratios would be “as high as 20 per cent to 25 per cent” – more than twice current levels.

He warned that the economic danger posed by excessive credit growth is so great that it is “almost certain” banks should be forced to hold significantly more capital than at present.

Lord Turner noted the international Basel III rules can require banks to hold a counter-cyclical equity buffer of  2.5 per cent of their risk-weighted assets but said that this should be  “much larger”.

The argument for hugely increasing the amount of capital banks hold has found favour with a number of central bankers, notably  Sir Mervyn King, who made the case while in office as Governor of the Bank of England.

However, any such move would be sharply resisted by the industry, which has long argued that it would curtail banks’ ability to lend to businesses and fuel economic recovery.

Banks are hoping that the plans for a new standards body will improve a reputation that has arguably never been lower in the wake of the financial crisis and subsequent taxpayer-funded bailouts together with the escalating list of scandals thrown up in its wake.

Sir Richard Lambert, a former director general of the CBI, said there was a “strong case  for collective action” among banks to  improve standards.

And he took aim at “industry norms” that “have incentivised short-term revenue generation as opposed to the duty of care to customers”.

“So long as this is allowed to continue, banking will fail in its efforts to raise standards of conduct.”

The body he envisages would develop metrics against which banks could benchmark themselves and then report annually on progress. It would, he said, act as a “champion” of better professional standards  in banking.

He also said it could validate training programmes and ultimately become a professional body for bankers potentially along the lines of similar organisations in accountancy or law.

Sir Richard said: “The objective is a measurable and continuous improvement in the conduct and culture of banks and building societies doing business in the UK. The credibility of the new body will be built on the independence of its board, and on widespread industry participation.”

However, Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards, warned that it could take years for such a body to become effective and urged rapid action in order to address his commission’s recommended reforms.

“This is a welcome start to a very long-term project. As the Banking Commission concluded, it could take at least a generation to create a credible, effective body,” he said.

“In the meantime, this work cannot substitute for the work of the regulators. The most urgent task now is for banks and the regulators fully to implement the proposals of the Banking Commission, including certification and linking reward to the maturity of the risk.”