Favourite to succeed Sir Mervyn King as Bank of England governor calls for end to City’s get-rich-quick culture
Paul Tucker, deputy governor of the Bank of England, has warned the worst could still be to come for the banking sector as he called for an end to the get-rich-quick culture of the City.
The favourite to take over from Sir Mervyn King as governor of the Bank of England, Tucker told a City audience: “There is a tangible probability – not a high probability – that the worst may still be ahead” for banks, which was why they needed to hold more capital.
Calling for changes to the way bonuses are paid to bankers, he stressed there was not a “single policy initiative” to make the system safer after the 2008 taxpayer bailout and warned that policymakers would face a backlash when they took measures to prevent exuberance in the future.
In his first speech since formally submitting his application for the post of governor Tucker said that Threadneedle Street wanted to make it easier for new banks to be established in orderto increase competition. He added: “I would say that the Bank believes what it always believed: that sound and honest finance is not only essential for the economy, it will be good for the City too.”
He said the Financial Policy Committee, on which he sits, was concerned a “tidal wave” could be coming. “We may all be grateful that there is a few billion more of capital here and there in the banking industry, keeping banks in the private sector rather than the dead hand of state ownership.”
Tucker outlined a number of reforms which were needed, and described the breakup of the Financial Services Authority into what is known as “twin peaks” – with the Bank getting banking supervision and the new Financial Conduct Authority looking after consumers – as “25 years too late”.
Tucker said bankers needed to be paid in subordinated debt and put more focus on customer service rather than sales and on the medium-term success of the firm.
“Putting it bluntly that would make it less easy to get rich quick irrespective of the quality of the business transacted or the compliance culture in their part of the firm,” Tucker said, indicating this would require changes to the codes on remuneration.
He said branch managers needed to no longer be seen as “an exercise in sales and marketing” but instead make credit judgments.
While changes are under way, Tucker said that all risk could not be avoided: “We need to find broadly the right balance between, on one hand, safety and, on the other hand, the contribution that sound and honest finance can make to economic prosperity.
“We may not be able to abolish the occasional waves of optimism that grip humanity and the tendency to excess when they set off. But we can and must dampen their effects on the financial system and economy. This must include changing the incentives that bankers face.”
He was addressing a City audience at the annual British Bankers’ Association at which the FSA’s managing director, Andrew Bailey, said he had made it clear to banks that the need to hold more capital should not be used as a reason to restrict lending to households and businesses.
He said the government’s funding for lending scheme, intended to cut the cost of borrowing, “should improve credit creation in the economy through lowering rates on new lending – but to some degree it may also enable banks to improve their net interest margins and thus build more capital”.
Bailey also praised banks for the forbearance they are offering on loans by restructuring the debts of customers in trouble. “I think banks deserve a thank you for the way in which they have sought to use forbearance”, he said, because their action had led to “fewer jobs .. lost and fewer homes repossessed.”
Speaking at the same conference City minister Greg Clarke compared rogue bankers who break the law by manipulating financial markets to the rioters who rampaged through UK cities last year – and said they should face similarly tough sentences, including jail.
Referring to the heavy sentences handed down to many rioters, Treasury minister Greg Clark said “a similar premium” should apply to financial crimes that seriously damage public trust.
“Most people expect things to work in a certain way. If someone breaks the law, they should be punished. When the crime is serious, they should be locked up. This should be as true for criminals who steal through financial manipulation as it is for those who break-and-enter.
“Indeed, just as sentences handed down to those who were convicted in last year’s riots reflected their contribution to the breakdown in the confidence and security enjoyed by ordinary working people, so must a similar premium apply to those crimes which destroy trust that so many people depend on.”
Meanwhile, Martin Wheatley, a senior regulator at the Financial Services Authority and boss of the soon-to-be-created Financial Conduct Authority (FCA), said the payment protection insurance (PPI) mis-selling scandal “has resulted in a huge clean-up bill akin to an oil spill in terms of ongoing damage”.
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