Do you think the FSA was structurally unable to see what has happening?
Well it has admitted that it completely failed over Northern Rock but in fact it failed over everything, not just Northern Rock.
But do you think it was because the FSA members were doing a bad job, or simply because the FSA was wired up wrongly?
You need a degree of experience and expertise which these people [on the FSA] wouldn’t have. Even if you could find high-calibre people to work full time you couldn’t afford to pay them. If somebody did go there who was really good, they would have been snapped up by the investment banks who would give them three or four or five times as much money. So it is not a system that can work. And there was this focus on conduct of business regulation, box ticking and all that at the expense of prudential supervision. There is an analogy with the way that the Ofsted regulated, do you remember the Haringey social services? They gave Haringey social services the top rating because they ticked all the right boxes, whereas now we know that the most appalling things were happening in Haringey social services.
However, having said that, the bankers themselves were obviously extremely culpable. Unfortunately I think it has become worse because we live in an age now when the acquisition of wealth seems to count more than reputation. They were taking ever greater risks, and if the risk went wrong their reputation would be down the drain. But they got the money, so that was all that mattered. So the bankers were extremely culpable.
There is one other thing too. During the 1930s slump, in the United States there were a whole lot of bank failures which made the depression very much worse and that was because in those days the Americans had a lot of small banks. The UK already had a very consolidated banking system so we didn’t really have any banking failures in the 1930s. Because the Americans were concerned about what happened to the banking industry, they passed the Glass Steagall Act in 1933 which basically said that retail deposit, commercial banking, financing of industry and so on was one thing, investment banking was another, they have to be separate and no bank could do both.
We didn’t do that in Britain. Partly because we didn’t have the experience of the banking failures in the 30s and partly because anyhow, by custom and practice, the commercial banks and the merchant banks (as they were called in those days), were separate anyway and they remained separate for many years. They only came together much later. Glass Steagall was I think fulfilling a very useful purpose, but it was repealed by Clinton.
The fact of the matter is that investment banking is innovative, there’s nothing wrong with it, rather speculative often but it’s high risk, high reward. Commercial banking is lower risk, lower reward. It is commercial banking which is absolutely vital. When the commercial banking system goes down that is what creates the systemic risk, because they are responsible for maintaining the payment system and where people deposit their money. People don’t deposit money in an investment bank. It is critical, it is a real problem, if the commercial banking system is threatened. So you don’t want to increase the risk of that happening by having it joined on to these high risk, high reward, innovative, buccaneering set-ups.