FSA chief fears turf war with Bank

The City regulator has warned Mervyn King, governor of the Bank of England, that his proposals for the Bank to take charge of financial supervision could damage stability and lead to pointless turf wars.

Adair Turner, chairman of the Financial Services Authority, suggested on Tuesday that sharing the role of tackling systemwide risk in the banking industry with the Bank, working through a financial stability committee.

Lord Turner told the Commons Treasury select committee he was “agnostic” on the suggestion that all banking supervision be returned to the Bank. But he insisted that, if the FSA continued to have a role, it must be given an almost equal status in dealing with systemic risk.

Mr King has demanded powers for the Bank to carry out its stability role, including overriding the FSA and insisting that individual banks took defensive action, such as building up capital or liquidity levels.

But Lord Turner said FSA staff would react badly to Bank edicts and “wasteful, competitive behaviour” could result.

The FSA, which supervises individual banks, would always take the blame for a failure and any errors in Threadneedle Street would leave “the Bank with power without responsibility and the FSA with responsibility without power”. Lord Turner proposed the nine-member stability panel be modelled on the Bank’s monetary policy committee, chaired by Mr King and including four FSA members. Such a move would ensure decisions were based on the Bank’s economic expertise as well as reports compiled by City regulators, he said.

Alistair Darling, chancellor, will argue in a Treasury paper next week that a debate on policy measures to tackle systemic risk take place before any institutional wrangling.

Lord Turner also dismissed calls for “too big to fail” banks to be broken up, as proposed by Mr King. He favoured the US approach where big banks with risky investment divisions were forced to hold more capital, which he called a “tax on size”.

He added: “I am significantly attracted to ideas by [US Treasury secretary Tim] Geithner’s proposals that we should think about not an absolute limit on size, that would be very difficult to achieve, but a sliding scale of capital requirements.”

Separately, he warned that bankers and regulators were showing signs of forgetting the lessons of the “biggest financial crisis in the history of market capitalism”. Lord Turner had noticed “aggressive” hiring by investment banks, raising new fears of irresponsible pay deals.

There were signs that some countries were losing their zeal for regulatory reform, he said. “There’s a real danger we don’t seize the opportunities of this crisis.”

“Lord Turner is right in what is happening but I would question whether [rising pay] is creating systemic risk,” said Stuart Fraser, chairman of the policy committee of the City of London. “Traders have been high earners for centuries.”

The Securities Industry and Financial Markets Association said it believed most banks and brokers understood that pay practices must change. “Restoring trust and confidence in the financial system must include a responsible approach to executive compensation,” said Tim Ryan, president. “SIFMA this month unveiled its own compensation reform guidelines . . . and we understand many firms are currently addressing this issue.”