Bruised Sants’ departure is another blow to FSA

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Hector Sants picked the worst three years in history to run a financial regulator.

Had he become chief executive of the Financial Services Authority in 2004 – three years earlier than he did – he would have received only back-handed criticism for failing to anticipate the crisis (like the rest of the financial establishment). That was the fate of John Tiner, Mr Sants’ predecessor, who left just before the run on Northern Rock. A year or so later and Mr Sants would have taken full credit for leading the FSA through the storm, bringing in structural and cultural change and contributing to reform of the global regulatory system – like Lord Turner, the FSA chairman since September 2008.

Instead, Mr Sants has been stuck in the middle, trying to defend and to reform the institution. It’s unavoidable as a result that he will leave the FSA with a mixed record – and a world-class collection of bruises and brickbats.

His opening salvo as chief executive in July 2007 – when he warned that financial institutions’ stress testing had not taken account of possible “sudden and abrupt changes in ratings and liquidity” – was on the mark, but came too late. As a board member at the FSA before that, albeit with responsibility for the wholesale sector, he must share the blame for not having flagged such concerns earlier.

His “Be Afraid, Be Very Afraid” speech last March – finally and firmly marking the end of the regulator as facilitator – struck the right tone. But again, after the turmoil of the Rock, the collapse of Lehman Brothers and the recapitalisation of the big British banks, Mr Sants looked like a man shaking his fist at departing storm clouds.

But he does know markets in a way his predecessors did not. That was a vital attribute as the wheels of international finance seized up in 2008. His investment banker work ethic (applied in a socially useful way) was vital in 2007 and 2008 when every weekend seemed to bring a new crisis.

Mr Sants’ departure will destabilise the FSA – but no more so than the ill-timed Conservative proposals to restructure financial regulation, which he opposes. His loss will, however, compound the uncertainty at an organisation already struggling to recruit top staff.

Inevitably, the retreating chief executive will also take fire from resurgent bankers who resent the interventionist approach he now champions. They should remember that their main criticism during the good times was that the rest of the FSA staff weren’t as sure-footed and smart as Mr Sants. The banks – and their customers – would have been much worse off if someone less determined had taken the FSA helm when Mr Sants did.

If the regime is now remade, without Mr Sants, they can only hope they won’t be worse off in future.

Quality versus quantity

More breast-beating from the banks that like to punt cash – or use it to reward employees who do so successfully – rather than squirrel it away.

As Basel III wends through the consultation process, expect the griping to intensify. Chastened regulators want to boost the capital cushion banks hold; banks – by definition – would prefer to deploy it more profitably. But the watchdogs have a point. The clue is in the name: core tier 1 capital should be an impenetrable safe for cash that nothing else can touch. But some of the junk tossed into the pot now is far from Teflon-coated. Deferred tax assets only have a value if the bank can generate the profits to cash them in; they are utterly worthless in the event of a liquidation. Meanwhile, pensioners should applaud the proposed changes to how their retirement pots are treated – stripping certain assets out of tier 1 (because whose money is it anyway?) and deducting deficits.

The rub is that better quality immediately reduces the quantity. Take out intangibles and capital cushions, pumped up by a spate of rights issues, swiftly deflate. Credit Suisse estimates that the changes in pension plan accounting will erase nearly €6bn of core tier 1 capital at the main European banks. UK banks, with their chunky deficits, would bear by far the biggest brunt. Evolution Securities sees core tier 1 capital adequacy ratios dropping by about 2-3 per cent across the leading European banks for end-2011 as a result of the latest proposed changes – with the odd outlier suffering disproportionately.

This would bring its own, familiar, attendant risks: more pro-cyclicality and less money for lending. The regulators don’t want that to happen any more than the banks do. With right – and wrong – on both sides, the only certainty is more uncertainty while banks and regulators battle it out.


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