Achieving a culture of change at lenders will be more effective than enforcing a split between banking activities, the U.K. Treasury and regulatory officials said today.
Plans to split deposit-taking banks from trading units aren’t “relevant,” and regulatory overhaul has limits without making banks change culture, U.K. Treasury Minister Paul Myners said. Financial Services Authority Chairman Adair Turner joined Myners’ call for a more traditional, less risky, banking system.
President Barack Obama proposed in January a ban on banks running proprietary trading desks. The U.K. has instead preferred to curb risk by making banks put away more capital against potential losses on trading books, and draft living wills.
“Better regulation will not be a panacea for improved banks and eliminating, or severely reducing, the risk of failure; a radical shift in culture is needed.” Myners told a banking commission that includes lawmakers from all three major U.K. political parties.
Turner reiterated that it would be hard to draw a legal split between banking activities. He said yesterday that several new macro-prudential tools would need to be used in combination in order to control asset bubbles in the economy.
“We simply don’t know if we have tools to change banking culture,” Turner told the commission today. “Culture is one of those things that is really important to work out, but it’s not clear what a regulator or supervisor can do.”
The FSA said in November that it would start judging how well senior-management candidates could influence the culture of their companies as part of its approval process.
Bank audit committees need someone who may not be a director who could take a contrarian view against presumptions made by banks’ accountants and boards, according to Myners.
“Why not go out and appoint a cynical Scot?” he said. “Somebody with an element of dourness; someone who can say to the audit committee: these are the areas that need to be tested.”
Turner said it was important to bring “mavericks inside the tent.” He has suggested a macro-prudential policy committee, akin to the Bank of England’s monetary policy committee, to undertake macro-prudential regulation, or supervising risks to the entire economy.
He said it was important to have people on such a committee who could challenge “groupthink.”
The Basel Committee on Banking Supervision, which sets minimum banking standards in 27 countries, will decide by November how much more capital banks need to hold, Turner said. It is important not to rush to implement the standards because it could slow economic recovery, he said.
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