Watchdog slams 'giant failure' that led to banking crisis

Tough new sanctions needed on directors of banks that fail, Lord Turner tells MPs

Britain's chief financial watchdog last night accused the financial establishment of a "giant intellectual failure" in the run-up to the financial crisis and called for tough new sanctions on the directors of banks that fail.

Lord Turner, the outgoing chairman of the Financial Services Authority, told the Parliamentary Commission on Banking Standards: "Banks are different in nature from retailers or manufacturers or hoteliers, they have the ability to make a mess of the economy rather than simply make a mess of their own businesses."

Lord Turner said bank directors as a result could not simply consider their role as being to maximise returns for shareholders as a result, and added: "There have to be sanctions which are different for bankers than the normal set of rules that apply to other sectors of the economy.

"People have often said in other sectors that Britain is too unwilling to accept serial bankrupts. That is fine for, say, innovative high-tech businesses. In relation to bankers, that is a disaster."

Lord Turner earlier warned: "In the world of those responsible for the financial system and risk management, there developed a theory (over the last 30 years) which was based upon the benefit of having efficient markets and the benefits of innovations and competing markets which was wrong. It was dangerous and a form of intellectual arrogance."

He said that Britain needed to become "reasonably safe against the re-emergence" of the "delusion" which took hold of banking in the run-up to the financial crisis that the system was made safe by these factors.

He said: "The question is how to we design it for 25 years' time when we have another. This time it's different, this time we're cleverer."

Lord Turner also warned that the network of interlinked derivatives traded between banks could yet spark another crisis: "I question whether we have been radical enough in questioning the 30-year explosion in interconnectedness and its potential for creating risks that we don't yet understand."

Andrew Bailey, who is head of prudential supervision at the FSA, said earlier that he feared giving watchdogs the power to force a break-up of banks which seek to break a proposed "ring-fence" that will protect depositors and small businesses could be effectively worthless. He feared regulators may be cowed by the big banks' lobbying power, particularly with politicians.

He added: "This is an industry that is habitually innovative and habitually will try and tunnel under the ring fence. A deterrent power has a lot of merit [but] it is a little bit like nuclear warfare, it has to have meaning.

"You have to create a structure where a power can be used if it is appropriate. It's a reality that I observe in this business, there is a very strong lobbying force, lobbying of politicians, lobbying of us."

The Commission, which will have a key role in shaping the Banking Bill, has repeatedly questioned witnesses on whether such a power would be effective in preventing banks from attempting to break through or "game" the ring-fence.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
Ben Little, right, is a Labour supporter while Jonathan Rogers supports the Green Party
general election 2015
News
The 91st Hakone Ekiden Qualifier at Showa Kinen Park, Tokyo, 2014
news
Life and Style
Former helicopter pilot Major Tim Peake will become the first UK astronaut in space for over 20 years
food + drinkNothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
News
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Sport
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
football
Life and Style
health
Voices
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
News
i100
News
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
news
Life and Style
Buyers of secondhand cars are searching out shades last seen in cop show ‘The Sweeney’
motoringFlares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own