The cost of the financial crisis may be much less than was initially feared, the chairman of the Financial Services Authority said yesterday.
In his opening remarks to the Treasury Select Committee, Lord Turner said: "Discussion of about the costs of this crisis often focuses on the costs of public rescue – exceptional central bank liquidity support, Treasury funding guarantees, and equity injections.
"But these overt costs, while significant, may turn out to be small relative to the overall costs of financial instability. Central bank liquidity support is provided at market or penal rates and may turn out to be profitable: guarantees are provided for a fee and may well not be called, and the equity stakes may rise in value in future."
Lord Turner said it was "quite possible" that the total overt costs of the big bank rescues may end up being less than 5 to 10 per cent of GDP, "and perhaps considerably less, as was the case in the Swedish banking crisis of the 1990s". But he said both regulators and banks had been "led astray" by the boom times and had been operating for too long on the basis that they could not end.
The peer added: "Everyone was seduced by the long boom. We were often led astray in the past by complicated mathematical rules. Regulators failed to notice the inherent weakness in that position."
He also warned MPs that there could easily be a repeat, saying: "History tells us that it could happen again."
Lord Turner said the FSA would look again at the regulation of financial products, although the watchdog is wary of such a move, given that an FSA stamp of approval could be seen as too much of a guarantee that they could not lose money. At the hearing, he also said London could not go it alone in squeezing the banks tighter if it still wanted a viable financial centre. Were the UK to take this step, he warned, it would inevitably lose business to rivals.
He indicated that banks could escape an outright ban on deposit- taking institutions indulging in "proprietary trading" – where they take bets on financial markets using their own capital. This, he said, could be covered by imposing much higher capital requirements on banks engaging in these activities.
However, he sought to play down a difference of opinion with Paul Volcker, the economic adviser to US President Barack Obama, who wants to see an end to bank trading that is unrelated to customer service. Lord Turner said he believed there was no "fundamental divergence" between Mr Volcker plans and the way the US Financial Stability Board (FSB) is addressing this issue. The FSB has been given the job of setting out banking reforms to prevent a repeat of the financial crisis by the G20 group of nations.
Lord Turned told MPs: "Having discussed this with Paul Volcker, I believe we are in full agreement on the means and that capital requirements for trading activities will be key."